Budget Speech 2004-05

Ministry of Finance Government of Pakistan

Bismillahir Rahmanir Raheem Mr. Speaker

1. It is an honor for me to present before this august House the annual budget of the federal government for the year 2004-05.

2. Mr. Speaker, in the last few years, we have laid a solid foundation of a reformed economy in Pakistan, which is poised to grow at an accelerated pace. This has proved that we have all the potential to match the growth performance that has been achieved by the leading East Asian economies such as Malaysia, China and Thailand. We are next to rone in human talent and material resources. The only thing we had lacked all along was a steady course toward progress. Rapidly changing economic policies characterized our economic management. Absence of consistent policies evokes fear and uncertainty and not confidence which is critical for steady economic progress. The manner in which we have expended sincere, honest and selfless efforts in managing the economy have gone to essentially fill this critical gap in our economic management. The results are before us and we are grateful to Allah for rewarding our efforts so handsomely. These should give us hope that destiny has not consigned us to the conditions we have found ourselves in. We have in us all that is needed to live respectably and with prosperity in the comity of nations.

3. Mr. Speaker, the year 2003-04 was the first full year of the democratic government of Prime Minister Mir Zafarullah Khan Jamali. As you are aware, many apprehensions were expressed by various quarters regarding the future of economic reforms under a democratic dispensation. With the grace of Allah, our performance has conclusively proved these apprehensions to be misplaced and unfounded. Not only that the process of reforms has moved forward, the country has registered robust progress in all the key indicators of economic performance.

4. The Prime Minister had promised that he would break the unhealthy and harmful tradition of policy disruption and inconsistencies in economic management. He had pledged continuity of reforms and strengthening of the economic gains made under the leadership of President General Pervez Musharraf during the year period 1999-2002. He has fulfilled these promises and consolidated the economic situation of the country.

Review of Economic Performance during 2003-04

5. For the first time in nearly 8 years, the country has achieved a growth rate of 6.4% against the target of 5.3%, which is substantially higher than the growth achieved by many developed economies and the economies of the region. The growth has been contributed by all sectors.

Agriculture

6. The overall growth rate of 6.4% looks more impressive in view of the fact that the agriculture has registered a growth of only 2.6% largely due to untimely rains and pest attacks. However, the prices of agriculture products have been quite

favorable to farmers. Indeed, based on price and output increases in the cash crops alone, an additional income of about Rs.60 billion has accrued to our farmers during the year. This is in line with our emphasis on improving the profitability of our farmers and we will continue to follow policies that would ensure that farmers receive good prices for their products. The rural economy is pivotal for the well being of our people as it houses nearly 65% of our population and caters for their livelihood. The focus of our policies, thus, would remain rural development through agriculture and agro-based industry. This budget will have a large number of measures to achieve this objective.

Manufacturing

7. During the year, the large scale manufacturing sector has registered a historic growth of 17.1%. Many products have experienced a double digit growth. Even within this group, a number of items have registered phenomenal growth like air conditioners (189.4%), phosphatic fertilizer (117.5), refrigerators (68.8%), electric transformers (77.6%), jeeps and cars (63.5), motorcycles (71%), tractors (42.4), electric meters (57.7%), cooking oil (22.9) and paints and varnishes (53.7). This massive increase in output would not be possible without commensurate increase in employment. Accordingly, the historic growth in industrial output points to significant increase in manufacturing employment, which is the key source of employment for urban residents.

Services

8. The services sector has also registered handsome growth of 5.2% against the target of 5.0%. Electricity, gas, water supply and construction have registered

growth above the target rate. Most notable performance has been witnessed in construction and gas and electricity sub-sectors. Against a decline of 2.5% last year, a phenomenal growth of 23% was recorded in the case of gas and electricity sub-sector. The construction sector grew by 8% against the target of 5%. The demand for hospitality services has also seen significant increase as all major hotels have reported high occupancy rates.

Fiscal and Monetary management

9. Fiscal management has remained prudent with budget deficit contained at 4%, the lowest ever in country's history. This has been made possible through a combination of expenditure control and outstanding revenue collection performance. We have significantly reduced the debt servicing burden of the country. From nearly 50%, the share of debt servicing in total expenditure is projected to decline to merely 27% in the revised estimates of 2003-04. This process will be further aided by reduced budget deficit as need for borrowings will be checked.

10. The fiscal space so obtained has been diverted in increasing the expenditures on the welfare of the people, for employment generation and increased provision of education and health services. From Rs.209 billion spent in 2002-03, the poverty reducing expenditures on social sectors have been increased to Rs.239 billion reflecting an increase on 14%.

11. On the other hand, for the second consecutive year, CBR has achieved its revenue collection targets. The target of Rs.510 billion for the year will be achieved, which is an increase of 11% over the actual collection of Rs.460 billion

last year. In the last four years, total tax revenues have increased by more than Rs.200 billion, which is a record. Clearly, we are now receiving the dividends of a better tax-compliance culture promoted by a reform process that we initiated a few years ago.

12. The State Bank of Pakistan has provided adequate supply of money and credit to support the process of growth. Overall monetary expansion which was targeted at 11% is likely to register a much higher growth of 15%. Since much of this expansion has flowed in private sector credit, it has facilitated the px>cess of investment and growth.

Balance of payments

13. Our exports have increased by 13% against the target of 8%. Today our exports have crossed the $12.5 billion mark and we are poised to maintain or increase the present double digit growth in exports. Our imports have increased by 19%, against the target of 5%. These are touching the $15 billion mark Although the deficit in our trade balance has increased, but this is a healthy increase as most of the increase in imports emanates from imports of capital goods and industrial raw materials, which showed an increase of nearly 30%. Both these items are reflective of increased industrial activity in the country, which have not only contributed to the present growth but holds promise for future growth also. Remittances from abroad have crossed $3.2 billion mark in the first 10 months against the full year target of $3.6 billion. For the third consecutive year, the current account will remain in surplus at $1.6 billioa The overall foreign exchange reserves have continued to grow, and at present stand at $12.5 billion, sufficient for nearly one year of imports. Largely due to these

positive trends in current account and reserves, for the third consecutive year, our exchange rate has remained stable.

Banking and financial sector

14. Our banking system is strong with adequate liquidity and interest rates at competitive level, which have resulted in reduced cost of doing business in Pakistan. This year, credit to private sector has stood at an unprecedented Rs.273 billion compared to only Rs.148 billion during the same period last year, showing an increase of 84%. The health of our banking system is constantly improving. Sate Bank has enabled banks to clean their balance sheets through active settlement arrangements and significantly improving the quality of their future lending. Accordingly, the overall non-performing loans of the banking sector have been reduced while there is negligible contribution to NPLs from fresh lending in the last five years.

Capital market

15. The stock market has continued to scale new heights with the index now standing at all time high of 5500 points. The daily turnover has crossed a billion shares, whereas new issues are coming at regular intervals and oversubscribed many times over. SECP is actively engaged to de-mutualize the stock exchange, which will significantly improve the quality of governance, efficiency of market operations and contribute to the transparency of transactions.

16. Mr. Speaker, our government has made serious efforts to accelerate the process of privatization. We have successfully privatized yet another public sector bank, which was also the largest in the country. Besides, we have adopted a novel approach of undertaking a series of initial public offerings of small percentage of shares of major public sector contributions like OGDC, PIA, NBP and SSGC. This has given tremendous depth to the stock market and allowed small investors to own shares in highly profitable public sector corporations and make handsome capital gains on these shares. During the year Rs.33 billion were realized on various privatization transactions. This process will be further accelerated in the coming year.

Investment

17. Mr. Speaker, a frequent refrain of our critics was that e^en though some macro indicators had improved, the process of investment had yet to revive. I am pleased to inform this house that the overall investment in the country has increased from 16.7% of GDP to 18.1% of GDP, which is highest in last eight years. It conclusively proves that our economy is in an expansive mode and in the years ahead the economy will grow at much faster rate. Both public and private sectors are playing their due roles in accelerating the pace of economic development in the country. The foreign investment during 2003-04 is likely to touch the $1 billion mark, which will also be highest in nearly 8 years. Nothing can reflect better the confidence of foreign investors on Pakistan's economy than the results of the auction of two mobile telephone licenses, in which 32 prospective investors had expressed interest. Both licenses were sold at a price of $291 million each, which is a record. It may be worth mentioning that such

licenses were given in the past without charging any meaningful price. We plan to charge adequate fees in future when the old licenses will come for renewal.

18. Increased investment is yet another sign of increased employment and income opportunities to our people. More importantly, it points to continued economic activities in the country as the investments begin to produce output with some time lag. The growth, in all likelihood, will accelerate in the coming years.

All round performance

19. Mr. Speaker: This is an all round performance, covering all key sectors of the economy. It has not happened over night but has gradually come to this level in the last four years. It was expected based on the reforms we have undertaken. It is also reflected in our credit rating, which has significantly improved to B2/B by the two international and independent rating agencies. It is not a freak that has been spawned by an event like the 9/11, which is now too old to exert any influence. The bottom line is that our economy has finally moved to the path of realizing its full potential. The government has created an enabling environment where our people are displaying their potential. We are only creating opportunities, which is all what is needed by our people to show to the world that they are next to none when it comes to talent and hard work.

Reforms lie at the core of economic performance

20. What we have done is neither magic nor rocket science. We have only done the sensible thing of correcting the wrongs that pervaded the country's economic organization. This is called the process of reforms, which means

allowing each player in the economy to play the role it is best suited to play. Business, government, regulatory institutions, markets and consumers all have a role to play best suited to their abilities. In our case, government became the leading business enterprise while severely neglecting its regulatory functions that in turn allowed businesses to flaunt regulations. Large public sector along side a weakly regulated business exposed markets to all kinds of manipulations. Colossal losses of government controlled businesses were picked up in the budget, costing billions to taxpayers. What is more, when tax revenues did not suffice, government borrowed and ended up mortgaging the future of our coming generations.

21. It is for this reason that our government has devoted most of its energies in designing and implementing the process of reforms, all of which were aimed at limiting government's direct economic role, expanding the action space for the private sector, strengthening government's regulatory function and allowing markets to play their due role in the process of price determination and resource allocation.

Regaining economic sovereignty

22. It is on the back of such deep-rooted structural reforms and outstanding performance registered by the economy that we have finally succeeded in regaining country's economic sovereignty. I feel proud to announce that Pakistan will be getting out of IMF program during this year at the successful conclusion of the current PRGF program We have already established our credentials by accessing the international capital market. In February 2004, we returned to Eurobond market for the first time in 7 years to float a bond of $500 million for

which we received subscriptions of $2000 million. This is the most potent signal of country's ability to stand on its own feet. We are no longer holding a begging bowl before anybody, be it a country or a financial institution.

23. Let me clearly state that termination of IMF program does not mean that we will abandon the orderly and disciplined economic management that we have achieved with so much pain or that we will stop dealing with international financial institutions (Ms). We are committed to prudent economic management and this will remain so in future. Our relation with other development partners, such as World Bank, Islamic Development Bank and Asian Development Bank, will remain intact. We need their support for development and for this we will act responsibly in our economic policies. More importantly, we have issued Eurobonds in which foreign investors have placed considerable investments, and they will be constantly evaluating our policies for their prudence and soundness.

Early retirement of debt

24. An equally important signal of the good health of our economy is our ability to pre-pay expensive loans. As I had announced in the last budget that the Government will pre-pay its expensive loans, we have already paid more than $1.6 billion to Asian Development Bank, JABIC and other lenders. We will take this figure to $2 billion during the calendar year.

Challenges remain on the horizon

25. Mr. Speaker: While reassured in the efficacy of our economic strategy, we are not complacent by progress we have achieved. We are conscious of

formidable challenges that still remain on the horizon. These challenges include the following:

(1) The need to push the growth rate to 8% and above before we can realistically hope to have a meaningful reduction in poverty. For this purpose, significant increase in investment is required, especially in the private sector.

(2) The need to improve human development indicators, which will call for significant increase in social spending.

(3) Public sector enterprises continue to bleed the budget and limit the fiscal space needed for social sector spending. An accelerated privatization of such units coupled with restructuring to reduce their losses is essential to contain this menace.

(4) Significant evidence is emerging that indicates that our growth potential is being seriously undermined by lack of adequate infrastructure of roads, water, power, gas and telecommunications. The need for major increase in development spending aimed at rehabilitating and expanding the economic and social infrastructure is extremely pressing.

(5) Lack of desired capacity in the system to fully absorb available investment resources. Implementation and governance bottlenecks, thus, need to be removed with concerted efforts.

(6) Law and order and image are clearly interrelated challenges. We have done a lot to tackle these issues and more needs to be done.

26. In the budget for 2004-05, we plan to address these challenges and take measures to overcome them.

27. Since reforms lie at the core of our economic turnaround, this process has to continue for a long time. So far the focus of reforms was to achieve macroeconomic stability, as we had inherited a declining and volatile economy. We now have to adopt a more radical approach to make a quantum leap into high growth trajectory. The incremental approach has to make room for this transition. For this purpose, the process of reforms will have to be accelerated and advanced to the level of second generation. The second generation reforms will focus on building the institutional and governance capacity and improving the competitive environment in the country. Civil services, police, judiciary and devolution will be the key areas of governances that would occupy our reforms efforts. On the other hand, in the face of emerging WTO challenges, our exports should be able to compete with global competitors. Thus we will focus on reducing the cost of doing business in Pakistan, especially in such areas as government regulations, tax distortions, efficiency of public utilities and removal of infrastructural bottlenecks.

Medium-term macroeconomic framework

28. As always, budget is a part of a three year macroeconomic framework spanning from 2004 to 2007. The key features of this framework are:

(1) Increase in GDP to 8% by FY 2006-07.

(2) Inflation to average at 5% throughout FY 2004-07.

(3) Investment to GDP Ratio to reach 20%.

(4) Fiscal deficit to reduce to 3% of GDP.

(5) Current Account Surplus will be gradually reduced to a deficit of 1.8% of GDP by 2006-07.

(6) Foreign exchange reserves to remain at a minimum equivalent to 28 weeks of imports.

29. Evidently, these targets are ambitious but quite realistic in view of the performance the economy has already recorded. Besides, our challenges cannot be overcome unless we take the performance to a level as reflected in the medium-term framework, and as such aiming at the above targets is absolutely essential

30. Although we are working within a three year macroeconomic framework, consistency of policy will require a broader development vision. I have, therefore, asked the planning commission to develop a five year development plan so that greater certainty and commitment together with investment priorities was available to nation for planning the future growth of economy.

Development plan

31. Mr. Speaker: As I have mentioned, acceleration in economic growth will require significant increase in overall investment in the economy. Government has a role in this process, as a larger part of infrastructure investment has to be undertaken in the public sector. As we are gaining fiscal space through prudent fiscal management, we are getting in a position to invest in areas that are constraining the growth potential of the economy.

32. The National Economic Council chaired by the Prime Minister and attended by four provincial Chief Ministers and federal ministers, has approved the annual plan of Rs.202 billion. This program is 26% higher than the current financial year's plan of Rs.160 billion. Given the higher base of last year, the increase in ADP represents yet another significant stimulus to the economy that would create employment and raise the productivity of the economy.

33. In view of the significance of development spending, I would like to highlight the key sectors where resources have been allocated and the potential productive gains likely to accrue to the economy from these investments.

Water

34. As you are aware, our future depends on harnessing our agriculture potential, for which water is the most important input. Even though Allah has bestowed us with abundant supplies of water, and we have fortunately inherited one of the world's most extensive irrigation systems, yet we have failed to fully utilize the available resources and have not maintained the efficiency of the irrigation system. According to one estimate, we would need more than $12 billion of investment over the next 10 years to meet all the needs of water storage and efficient maintenance of irrigation system. Our government has placed highest attention to meet the challenges of the water sector. In the last three years, a large number of water sector projects have been initiated by the Government. These include new dams, expansion in the capacity of existing dams, construction of new flood canals, lining and rehabilitation of existing canals, lining of minors and water courses, construction of drainage facilities and flood protection and management schemes. Significant benefits in terms of employment opportunities,

additional lands for cultivation, greater availability of water and income augmentation for farmers will accrue on the completion of these schemes.

35. This year water sector has been allocated Rs.21 as against Rs.15 billion last year, a significant increase of 40%. This investment will have salutary effect on farm productivity, which at present is severely constrained by unreliable availability of water.

Power

36. Pakistan has one of the lowest per capita consumption of electricity with a sizeable portion of population without having access to electricity. Although we are presently not facing the electricity shortages that we faced some 10 years ago, yet the growth in electricity demand is fast outstripping available supplies. From generation to transmission and from transmission to distribution, all segments of the power sector need large investments to meet the electricity needs of an expanding economy. It is estimated that to prevent any major gaps appearing in demand-supply situation of power, an investment of more than $5 billion will be required over the next five years. Such massive investment needs cannot be met in the public sector alone. Indeed, greater part of this investment has to come from the private sector, for which we are designing appropriate policies.

37. During the year an allocation of Rs.29 billion has been kept for the power sector, which will be used mainly for constructing new hydel projects and laying transmission lines from various generation facilities to bring power to the national grid. I may add that a much greater investment effort in power generation will be undertaken by the private sector for which the private power board has already

issued Letters of Support (LOSs) for a total of 2521 MW, which will all be based on indigenous fuels like gas, hydel, coal and solid-waste.

Communications

38. Communication links are vital for efficient economic organization. Both urban and rural populations need communications for their economics. Farmers will not be able to get good prices for their produce nor can urban producers be cost effective in the absence of communication links that can efficiently transport their products to target markets. Indeed, development of efficient communication links is an important instrument of poverty reduction, as a significant number of poor people are disconnected with the places of economic opportunities. It is for this reason that our Poverty Reduction Strategy has given prominence to communication sector. We have three objectives in this regard. First, to provide linkages between nation's major production centers, seaports, airports and railways. Second, to provide the rural population access to markets, health and social welfare and education centers. Third, to support evolvement of Pakistan into a regional transportation hub.

39. During the last four years the government has initiated a large number of highways and roads projects to improve the overall communications infrastructure of the country. Some of these projects, like the Makran Coastal Highway and Karachi Northern By-pass have the potential to bring a major transformation in the lives of the people living in the surrounding areas. Other projects, such as Islamabad-Peshawar Motorway, Gwadar-Turbat-Khuzdar road, completion of Indus Highway and Lowari Tunnel have equally important contributions to make to the economies of areas connected by them.

40. In the budget 2004-05, an allocation of Rs.17 billion has been kept for implementation of the above projects as against Rs.16 billion during the current year. It may also be mentioned that in the communications sector also we are encouraging private sector to invest. State Bank of Pakistan has designed special regulations to support infrastructure financing by the local banking and financial institutions.

41. Rail system is a major asset of Pakistan. Over the years, it has been neglected and adequate investments were not made to keep pace with technological advances, resulting in reduced efficiency and loss of competitiveness vis-a-vis other modes of financing. In the last four years, we have taken measures to revitalize this sector and presently it occupies a significant position in our transport and communication strategy. It is proposed to corporatize Pakistan Railways so that it can be transformed into a modern and efficient service. As a first step, the Railways Board will be separated from the Ministry of Railways and reconstituted with due representation from the private sector. This year an allocation of Rs.9.3 billion has been made to provide for critical investment needs of the railways.

42. Efforts are also being made to upgrade the port facilities in the country. In this regard the most significant project is the Gwadar Deep Sea port which will now be completing by the end of the year. To ensure that the Gwadar port was completed on time, an allocation of Rs.5 billion has been kept. In addition a number of projects for improvement in harbor and port facilities have also been taken in hand.

43. Gwadar port represents a watershed in country's economic development. We are declaring a vast area around the Gwadar seaport as Free Trade Zone that would promote a variety of warehousing, trans-shipment and industrial activities. It is our fundamental asset to develop regional economic ties, as it will further reduce the distance of Afghanistan and Central Asian Republics to the warm waters of the South. As I have already mentioned, we are working on a number of roads that would link Gwadar to Karachi, north as well as Central and Western Afghanistan.

Human Development

44. Our most precious resource is our people, who are as hardworking and talented as one can find anywhere in the world. Yet, we have not nurtured their talent nor taken full advantage of their hard labor. More than in any other case, it is in the case of human resources that one finds Pakistan truly missing the opportunities it has. In fact, the country has begun to experience key shortages in skills that are needed to support an expanding economy.

45. Our government has placed human development at the center of economic planning. The three key areas of human development, namely education, health and population welfare are attracting significant attention of the government. In the education sector, an allocation of about Rs.13 billion has been made against an allocation of Rs.6 billion last year. This represents an increase of 134%, which is unprecedented in country's history.

46. In the health sector, we have increased the allocation from Rs.4 billion to Rs.6 billion, representing a rise of nearly 50% On the other hand, the allocation

for population welfare has been increased from Rs.2.5 billion to Rs.2.6 billion representing a rise of 4%.

47. It may be mentioned that the primary responsibility for human development lies with the provinces. The federal expenditures are in addition to much larger expenditures being expended by the provinces.

Tameer-e-Pakistan Program

48. Mr. Speaker, as you are ware, last year we initiated a new program of small development schemes, with the involvement of the members of the Parliament. Last year an allocation of Rs.3.9 billion was made for this program, which is used for building small development schemes such as supply of electricity, gas and water. In view of the significant benefits that accrue to the target population, it has been decided to increase this allocation for the next year to Rs.5.4 billion, which represents and increase of 38%.

Provincial and Special Areas

49. In addition to federal program, there are important development plans for provinces as well as for special areas, such as AJK and Northern Areas and FATA. For provincial program, ADP has been increased to Rs.54 billion as against a program of Rs.47 billion last year, showing an increase of about 15%. For the special areas, including AJK, an allocation of Rs.ll billion has been made compared to Rs.10 billion last year.

50. Mr. Speaker, except for WAPDA and KESC, most of the public sector corporations were long taken out from the budget as far as their investment plans are concerned. It is important to recognize that in addition to the development expenditure that I just outlined, a sizeable investment is undertaken in the public sector through these corporations. It is estimated that a total investment of at least Rs.50 billion will be made by these corporations during the next fiscal year. These corporations include PTCL, OGDC, PIA, SSGC and SNGPL. This will supplement the annual plan investment of Rs.202 billion and provide major impetus to growth in the economy. Also, when combined with public sector corporations, the overall public sector investment will be nearly 5% of GDP. These investments will further add to job opportunities, increased income for our people and increased economic activities in the country.

Social Safety Nets

51. Mr. Speaker: The Government is conscious of its responsibilities to protect the vulnerable groups from the undesirable outcomes of free-interplay of markets. A number of programs of social safety net have either been initiated by our government or have been significantly strengthened during our tenure. These include the food support program, micro credit program and Zakat. Let me give the progress of these programs and some new initiatives that we plan to introduce during the year.

(1) Food support program: This program was introduced in 2000, whereby a cash subsidy of Rs.1200 was given to some 1.2 million of the poorest of households throughout the country. These households were picked up through a well targeted program. Last year, our government had increased this subsidy to Rs.2400 per year. During the year we plan to spend Rs.4 billion on this program, which is being managed by the Pakistan Baitul Maal.

(2) Microfinance: Microfinance is a highly effective instrument of poverty reduction. Emphasis is placed on self employment of those who have skills but no capital to start business. This instrument was in use informally in the country through a network of selected NGOs. Our Government has mainstreamed this instrument through the introduction of a proper law that is patterned on the banking companies' regulation but adapted to peculiarities of micro financing. Khusshali Bank was established in 2000 and has now blossomed into a national institution that has established its offices in 38 districts and would soon be covering 60 districts by the end of year. It has already disbursed more than Rs.2 billion to nearly 211,000 clients. In addition, First Microfinance Bank has been licensed under the new law and is now entering into second year of operations. There are 4 applications pending for the establishment of new banks in this sector, being presently evaluated by the State Bank of Pakistan. The Pakistan Poverty Alleviation Fund (PPAF) is another institution that has been set up by the government to promote the microfinance in the country. Initially, we had set up the Fund with $100 million. Now we have arranged another $250 million (Rs.15 billion) to PPAF, which will be available over the

next five years. In addition, bilateral donors have contributed Rs.2 billion for building the Fund. PPAF gives micro credit on wholesale basis to NGOs engaged in this activity. So far, PPAF has already disbursed nearly Rs.5 billion in 86 districts through 40 partner organizations. Of this, Rs.3 billion were given as micro finance to 312,000 persons for enterprise development. It is estimated that with these resources, Pakistan will soon enhance its outreach to more than 1 million beneficiaries. PPAF also provides support for small community development schemes such as water supply, sanitation, training and capacity building. So far it has provided Rs.l billion for 5230 schemes of community physical infrastructure, while Rs.547 million were disbursed toward human and institutional development. A total of 1.87 million people will benefit from community schemes whereas 63,000 people received training from different capacity building programs. In addition a number of rural support programs, set up by federal and provincial governments, are operating at the national and provincial levels rendering excellent services for community mobilization, social development, provision of micro finance and construction of small infrastructure schemes.

(3) Zakat program: Zakat now occupies central position in country's programs of social safety net. During July-March this year, total disbursements this program amounted to Rs.3.8 billion compared to Rs.3 billion in the same period last year. Number of beneficiaries increased from 865,000 to 1100,000. The share of female recipients also increased from 35% to 40%.

52. Government is constantly applying itself to design new programs for the welfare of the vulnerable groups. There are three programs that we plan to introduce during the year 2004-05. Let me briefly describe them:

National Technical and Vocational Training Authority

53. There is increasing evidence that the country is beginning to experience skills gap. On the other hand, many of our children drop out from schools, or even when they continue they fail to acquire marketable skills. There is, therefore, a pressing need to plan for building a strong pool of skills among our young people so that they can earn a decent living for their families. With a view to giving a major impetus to technical and vocational training in the country, it is proposed to establish a national technical and vocational training authority that would undertake national planning, curriculum development, standardization of technical education, training of trainers, national accreditation of private polytechnics and institutes and develop strong linkages with the industrial end-users. Since this is an effort that would ultimately benefit our industry, it is proposed that a leading business leader should spearhead this initiative on a voluntary basis. This will afford close coordination with industry and proper synchronization of demand and supply of proper skills. Let me mention that this effort will not simply aim at meeting local demand, rather it will focus on locating new markets for our workers. Accordingly, not only our own skills gaps will be filled but country will have better prospects for manpower exports that will contribute to exports earnings. In this budget, we are offering tax incentives to

private sector to set up technical and vocational institutes, which will have to accredited with the new authority to qualify for these incentives.

Rural development

54. In view of the fact that majority of poor live in rural areas, focused development efforts aimed at small communities are required to make a difference. During the year, a pilot program will be launched in selected villages that would bring together local communities, rural support programs, irrierofinance institutions, local representatives and local government officials. This is a novel idea, whereby a combination of community infrastructure schemes, capacity building and private enterprises development will be promoted side by side. Government is committing Rs.100 million for this pilot program which will be supplemented by the resources of Pakistan Poverty Alleviation Fund (PPAF) and Khusshali Bank. National Commission for Human Development, Citizen Community Boards, National Rural Support Program and Devolution Trust for Community Development will be charged with the responsibility to mobilize communities for the program. Depending on the results of the pilot projects, Government will scale up the program and add gradually more villages in the program.

55. In recent years, cottage industries have not received the kind of attention they deserve and the potential of employment generation they represent. It is proposed that at a selected number of rural and urban locations concerted efforts will be expended to promote cottage industries suitable to the local skills. Throughout the country we have pockets of extremely talented men and women specializing in a specific trade or craft. Such people have not received the support that will be needed to turn their skills into productive and marketable enterprises. With the help of SMEDA and microfinance institutions, government plans to bring a mix of credit, technical advice and marketing support for these skilled people of Pakistan. There is demand both at home and abroad of our handicraft, which must be exploited so these talented people earn a decent living and their art is preserved.

56. Similar efforts are being launched specifically for women, who constituted a vulnerable group in our society. Ministry of Women Development will be launching this program with a seed capital of Rs.100 million, which will be supplemented by microfinance institutions and First Women Bank.

Program of urban renewal

57. Mr. Speaker, our urban centers are facing rising population pressures while civic amenities are not keeping pace with increasing demand. Consequently, urban infrastructure is fast decaying, while the governance apparatus - municipal authorities, police, judiciary - is continuously strained. There is, therefore, a need to undertake a major development effort aimed at rebuilding and renewing all kinds of urban infrastructure and civic amenities, including the quality of governance. We are currently working with our

development partners to develop an integrated program of infrastructure investments along side a reforms program that would see capacity building, improved financial management, adoption of international best practices in the provision of local administration and provision of civic services. The program will also explore the possibility of endowing municipal administrations the authority to raise their own finances from the financial sector. For this purpose rating arrangements will be developed so that municipal bonds can be issued by such authorities.

58. This is a highly ambitious program, but it is critically needed to save our cities. We are confident that this program will not only improve the lives of urban residents but will inspire business confidence and promote industrial development, which is closely to a well functioning city government.

Page 26BUDGET SPEECH 2004-05

Debt management strategy

59. When we began our journey for economic revival one of the most formidable challenges facing the country was the huge public debt that imposed heavy debt servicing burden on our budget. While accumulating such huge debt no one realized that it was amounting to mortgaging the future of our coming generations. This was not a happy situation and future growth in debt had been checked with all possible measures. Inevitably, one of the main focuses of our economic strategy was to significantly reduce this burden and create the much needed fiscal space for social sectors and development spending. I am pleased to inform this august house that we have achieved outstanding success in this regard. The following are the key debt indicators signifying the massive reduction in country's debt burden:

(1) Overall public debt has declined from 108.5% of GDP in 2000-01 to 85% of GDP in 2003-04;

(2) The external debt, which stood at 59.2% of GDP in 2000-01, has come down to only 42.2% of GDP in 2003-04;

(3) The domestic debt, which stood at 50.5% of GDP in 2001, has come down to only 41.3% of GDP in 2003-04;

(4) The overall debt servicing, which claimed more than 50% of our revenues in 2000-01, has been brought down to only 27% of revenues in 2003-04;

(5) The return on treasury bills, which had at one point shot up to as high as 17%, is now around 2%, indicating high liquidity in the system;

(6) The average lending rate that was as high as 15% in 1998-99 has come down to less than 6%;

(7) Debt sustainability is fully evident from the fact that our external debt and liabilities as percentage of our foreign exchange reserves, which were as high as nearly 2000% have been brought down to mere 282%.

60. Evidently, these results reflect the success of our debt management strategy, as the enormous debt servicing burden that was a drag on our economy has been significantly reduced, thus releasing precious resources for increasing the development spending in the country. In the years ahead, the nation can hope to experience rising growth rates, increased job opportunities and improved standards of living for our people.

Fiscal responsibility law

61. This dramatic improvement in country's debt burden has been made possible through a combination of factors that included re-profiling of our debt, cancellation of debt by some creditors, contraction of concessional debt, reduction in fiscal deficit and pre-payment of expensive debts. While we will continue to maintain this policy stance, the more important need is to ensure that these gains are permanently consolidated through appropriate safeguards in our system of fiscal management. To this end, we have tabled a fiscal responsibility law that would limit the extent of borrowing by the government in future.

62. Mr. Speaker by introducing this bill, we are submitting to legislative limits and parliamentary oversight on fiscal management, which so far have been

missing from our statutes. Presently, our Constitution has not placed aiy limits on executive authority of the federation to borrow money on the security of the Federal Consolidated Fund. It is an opportune moment to fill this gap to ensure that our future generations will not be mortgaged as mercilessly as had been done in the past. I urge the House to ensure that the bills is given safe passage and made a law to regulate the process of borrowing in future.

Prices

63. Mr. Speaker: Pakistan is enjoying unprecedented stability in prices, since for the fifth consecutive year inflation has been contained below 5%, which is quite acceptable for a developing country. Yet, we are conscious that with rising growth and changes in international conditions, prices are beginning to come under pressure, especially for lower income groups, whose prices have risen up to 6-7%. Until recently, these prices were rising largely due to increases in international prices of oil. Although this pressure has intensified in recent months, we have reduced our dependence on oil by utilization of indigenous gas. Also, both WAPDA and KESC are trying to improve their performance. In the last three years, the Government has provided an amount of Rs.130 billion in subsidies to WAPDA and KESC to ensure that consumers are not exposed to their inefficiencies and the high cost of private power to which both of them have been consigned. Even this year we will be providing subsidies of another Rs.46 billion for this purpose. It is difficult to imagine the burden people would have felt had all the cost increases were to be passed to them.

64. Thanks to the increased availability of gas and commissioning of Ghazi Barotha power project that WAPDA has developed a cushion that we are passing

on to the consumers. I take pleasure announcing the government's decision to reduce electricity tariff by 10 paisa per unit for domestic consumers, 25 paisa for commercial consumers and up to 58 paisa per unit for industrial consumers. This subsidy being provided despite the fact that the domestic tariff for consumers of up to 300 units is already heavily subsidized. KESC is also making suitable reduction in tariff. This will result in an additional subsidy of Rs.2 billion. It has further been decided to equalize the fixed charges for tubewells in Punjab and Sindh with those applicable for Balochistan and NWFP. These are significant relief measures, which will go a long way to lessen the burden of electricity prices and improve the competitiveness of both agriculture and industry. For now, this is the most government could do without affecting fiscal discipline. We hopeful that in the time to come further relief will become possible after the front loaded payments of IPPs have been completed.

65. Another area where prices have pained our consumers is the price of wheat. As I mentioned earlier, untimely rains have affected the wheat crop, which was billed to be a bumper crop but for this weather contingency. In addition, there had been delays in procurement of imported wheat that compounded the problem. We have now overcome these problems and prices have stabilized. We are importing 1 million tons of wheat to maintain strategic buffer stock and have taken measures to curb hoarding. Import of wheat will require payment of subsidy of nearly Rs.5 billion. However, because of these measures, of late the flour prices have begun to return to their normal level. The ECC is keeping a vigilant eye on flour prices and we are now better prepared to meet any unexpected contingency.

66. Mr. Speaker, there has been considerable debate on whether the economic gains country has made were trickling down to our people at large. In particular, a number of unsubstantiated estimates were put forward for the poverty levels in the country. It is important that facts in this regard are clearly laid out before this House.

67. Although Households Income and Expenditure Surveys, that require considerable resources, are conducted at longer intervals, to settle such questions, Government commissioned a sample Survey of Household Consumption Expenditure (HICS) with a view to gauging the impact of macroeconomic policies on the living standards of people of Pakistan. The Survey, covering 5046 rural and urban households, which was l/3rd of the sample of regular survey conducted in 200-01, from all the four provinces, was conducted during April 19, 2004 and May 06, 2004. The findings of the survey are highly encouraging. Not only has that incidence of poverty shown a significant decline but other social indicators as well as indicators that represent living standards of the people have shown marked improvement over 2000-01. These results show that incidence of poverty has declined by 4.2 percentage points with both urban and rural poverty showing decline in 2004 compared to 2000-01. These results are not surprising as the Survey shows that there has been a 35% increase in the average monthly consumption expenditure of households.

68. There is now clear evidence that benefits of growth are beginning to reach out to our people. With increase in growth more such benefits will be transmitted

to people, as jobs will be created and easier access to health and education will be provided.

Agriculture Package

69. Mr. Speaker: I have already underlined the significance of the agriculture sector in our economy. Apart from contributing 26% to our GDP, the sector provides livelihood to nearly 65% of our population. More importantly, it houses the largest number of poor people in the country. For all these reasons, development of this sector is central to the well being of our country. Government is conscious of this position and has included it among the four sectors declared as the drivers of growth.

70. I have already indicated the initiatives we are taking in the water sector, which are essentially related to the development of agriculture. In addition, we plan to take the following initiatives for the agriculture sector as announced by the President General Pervez Musharraf at the Kissan Convention on Thursday:

(1) Through adjustments in the taxes the prices of DAP is being reduced by Rs.100 per bag.

(2) With a view to easing the emerging shortages in the market for tractors, the import policy is being revised to allow for only 40% of deletion in the first year and 100% deletion within five years. This measure will promote investment in new tractor plants in the country.

(3) In addition, import of new tractors below 35 HP and above 100 HP will be allowed with only 10% duty. There will be no GST or

withholding tax on such imports. This will not hurt our local industry as they do not manufacture tractors in this range of horse power, whereas the measure will help alleviate emerging shortages in tractors supply.

(4) The import of all agriculture implements not manufactured locally will be allowed with out imposing of any import duty or sales tax.

(5) The existing pesticide import structure was designed in a manner that it favored import of finished and formulated pesticide and discouraged local formulation. To correct this, it is proposed to modify the duty structure on imported pesticides that would encourage local formulation.

(6) Pakistan is self sufficient in the production of urea fertilizer and for this reason we have been insulated from international price escalations. Even today urea prices in Pakistan are 25% below the international prices. Unfortunately, we will run out of ureas manufacturing capacity by the end of the year and will need to import to meet the local demand. Ministry of Petroleum has been directed to formulate a new gas policy, which will facilitate the setting up of at least one new urea manufacturing plant This policy will be ready by 30th June 2004. Similarly, Ministry of Industries is also in the process of finalizing the fertilizer policy.

(7) To ensure cheap availability of credit to agriculture sector, ZTBL will lower mark-up rate from 14% to 9%, whereas those who would pay on time the applicable mark-up rate will be 8%. This rate will be applicable for all types of new loans and financing of tractors and tubewells.

(8) ZTBL is being restructured with a view to providing better services to farmers.

(9) It has further been decided that with immediate effect the power of ZTBL to recover its dues as arrears of land revenue will be withdrawn. This will save the poor farmers from the humiliation of arrest and imprisonment.

(10) It has further been decided to offer a settlement scheme for small borrowers of ZTBL with repayment difficulties. For loans of Rs.500,000 that are in arrear since 31-12-2000, settlement can take place on payment of 50% of the outstanding amount or full principal, whichever is higher. In addition, for small borrowers of up to Rs.200,000 from Balochistan, living in areas which have been affected by persistent drought, and having arrears since 31-12-200,. settlement of can be made on payment of 25% of the principal amount.

(11) The package for corporate farming is being finalized and will shortly be announced;

(12) A framework to revive the cooperative farming practices is being evolved in consultation with provincial governments and will soon be announced.

(13) Private sector banks are being encouraged to lend to the agriculture sector. Of the total credit of Rs.61 billion to agriculture sector, private sector banks provided Rs.32 billion, while ZTBL provided 29 billion. Next year, the target for agriculture credit is set for Rs.80 billion, which would mostly come from private sector banks. In addition, banks are issuing agriculture credit cards and lease financing for tractors and agriculture machinery.

71. Mr. Speaker, this package will go a long way to enhance farm productivity and incomes of our farmers. Since the majority of low income groups are living in rural areas, improved agriculture performance will impact positively on the economic lives of such people.

Package for Industry

72. The manufacturing sector has rendered remarkable performance during the year. It has established the fact that there is enormous scope for the growth of this sector. Indeed, the sector has responded to the incentives that we announced in the last budget, whereby we had lowered duties on nearly 5000 items on raw materials, while giving adequate protection to the final products. We are following the same approach in this budget as I will announce massive reduction in duties of capital goods, raw materials and afford due protection to final products.

73. Availability of credit at competitive rates is the key to the growth of industrial sector. As I noted earlier, this year there was historical growth in credit which rose by 84%. Government will continue to maintain the fiscal stance that has been the major cause of lower cost of capital and increased availability of credit to the private sector. Some of the new measures that we are taking to facilitate the industrial sector are as follows:

(1) Provincial governments have been asked to further liberalize the working of industrial sector by removing the intervention of a

number of departments such as inspectors of shops, labor and electricity.

(2) Visits to industrial units will be pre-announced with appropriate notice.

(3) Significant relief is being provided to industry in the administration of sales tax, which will go reduce the cost of production and enable our industries to provided cheaper products to consumers. Besides, sales taxes are rationalized, the net of excise duties is further curtailed and the overall tax regime is made taxpayers friendly through a number of facilitation arrangements.

(4) To meet the challenges of new WTO regime, which will come into effect in January 2005, we have allowed liberal import of machinery and given accelerated depreciation allowance. These measures will significantly improve the global competitiveness of our industry by reducing the cost of doing business in Pakistan.

(5) To assist the industries to meet the international environmental standards, effluent treatment plants will be established in all the major industrial estates for which funding support will be arranged through a government guaranteed program;

(6) A new textile city has been established that would provide a modern industrial estate with all the utilities and export processing zone facilities.

Promotion of Employment

74. A major focus of our economic policies is to create job opportunities for our people. The public sector development plan of Rs.202 billion will unleash

massive economic activities in the country and create a large number of job opportunities for our people. The annual plan expenditures will create some 1 million jobs.

75. But we must realize that in the new economic environment evolving in the country, Government will no longer be the primary employer of those looking for a job. Indeed, our slow economic progress in the past was primarily the result of our misplaced emphasis on creating a big government that became the largest employer in the country. Inefficient bureaucracies and loss making public sector enterprises by definition live of government budget, which means on taxpayers money. Prudence demands that such jobs should be discouraged and instead the focus should be on productive employment.

76. Larger contribution to employment opportunities has to come from the private sector, where jobs will be productive and add to the prosperity of our country. We are facilitating private sector investment by promoting an investors' friendly environment where they can invest with freedom and without bureaucratic wrangling. There are four sectors where employment opportunities are being created, namely agriculture, housing and construction, small and medium enterprises (SMEs) and information and communications technology (ICT). In each of these sectors we have taken a wide range of steps to facilitate the process of investment and job creatioa

77. Provision of credit for SMEs, induction of more banks and financial institutions for providing credit to agriculture and establishment of technology parks for IT companies are some of the initiatives adopted to give a head-start to these sectors. We have also revamped the SME bank. It will play a more proactive

role in assisting small and medium enterprise. The "Hunarmand Pakistani" scheme, which was launched last year for a small group of industries such as cutlery, surgical instruments, doctors and dentists clinics, women entrepreneurs, CNG stations, attracted lot of attention. So far Rs.2.2 billion have disbursed to 3,967 enterprises, creating some 16,000 employment opportunities. As a further incentive to SME financing, SME Bank will be reducing its cost of lending from 11% to 9% for those who are paying their obligations on time. Furthermore, a large number of tax measures are being taken to reduce the cost of business and improve profitability of SMEs. Next year, the Bank will be increasing its lending to Rs.3 billion and will broaden the scope of industries under the "Hunermand Scheme". A number of tax measures, including 10 fold increase in the minimum threshold for application of sales tax regime, are proposed to be adopted that would reduce the cost of doing business for SME sector and channel investment in this important sector.

78. In addition, we are facilitating provision of micro credit that would provide further opportunities for self employment. Government is also expending serious efforts to secure overseas jobs for its people. This year Overseas Employment Corporation assisted in providing jobs to about 127,000 Pakistanis abroad, including some in new markets such as Malaysia and South Korea. Next year, a target of 350,000 has been set for overseas jobs for Pakistanis.

Promotion of Housing and construction sector

79. Mr. Speaker, last year the government had included housing sector among the drivers of growth, which list was earlier restricted to agriculture, SMEs, oil & gas and IT. There are strong backward and forward linkages

associated with housing and construction sector and hence a spurt in activity in this sector would unleash a chain reaction in other industries. It is said that no less than 40 industries are linked to construction and housing sector. More importantly, the sector has a high elasticity of employment and will thus create more jobs in the economy.

80. A number of measures were adopted last year to give impetus to the housing and construction sector, including significant reduction in import duties on building materials and easier access to financing. These measures have helped revive construction activities in the country. During the year, construction sector has recorded a growth rate of about 8%, which could easily be doubled or tripled provided we remove the irritants that continue to impede its development.

81. Throughout the year we have remained engaged in furthering the cause of this sector. Both President General Musharraf and Prime Minister Jamali have taken keen interest in this process. Many of the key issues that require resolution for further liberalization of the investment environment in this sector relate to provincial regulations, quick clearance of designs, issuances of completion certificates and a host of NOCs required from a number of building control and development authorities. We will continue to exert serious efforts to remove the remaining bottlenecks of this sector.

82. In the present budget we are taking some additional measures to improve the profitability of investment in this sector. These include:

(1) Elimination of excise duty on paints.

(2) Significant reduction in the duties of a number of building materials including steel and its products.

(3) Significant reduction in the duty on imported machinery for construction sector together with exemption from the levy of sales tax and withholding income tax.

83. All banks have begun lending for housing sector and with further improvement in the building regulations and administration and quick settlement of disputes in courts, banks will be further encouraged to lend to this sector, particularly for large development schemes.

Removing the problems of titles

84. A key constraint in the growth of housing construction sector is the uncertainty that surrounds the title of properties. In almost all housing societies and building authorities, people face enormous difficulties to secure proper and reliable titles of their properties. Ordinary people are apprehensive to deal with real estate agents lest they will be defrauded of their hard earned savings. Even when people are sure of the transaction they face numerous difficulties to fulfill the requirements of securing proper transfers and mutations. What is more, for these very reasons, banks and financial institutions are apprehensive to undertake projects in this sector.

85. I am pleased to announce that the Government is undertaking a major effort to remove such uncertainties from the real estate markets. With the help of provincial governments all records of building authorities and societies will be computerized and public disclosure will be made of ownership of properties so

that consumers can enter into real estate transactions without fear of misrepresentation and fraud. This process will clearly take time but the work has started and we will keep this House and public fully informed of the progress in this regard.

Expatriate Pakistanis

86. Expatriates are one of the major resources of Pakistan. Not only they are performing ambassadorial functions but earn valuable foreign exchange so preciously needed for economic development. This year, they will be remitting $3.8 billion against a target of $3.6 billion. We have taken a number of initiatives to promote the welfare of expatriates and maintain their links with their motherland. A scheme to provide them facilities on arrival and departure of expatriates is in operation for the last three years. Under the scheme, they are also entitled to import duty free goods on their arrival. We are enhancing the duty free allowance as well as adding a few more items to the list of eligible goods under the scheme. I would urge the expatriates to continue to send their remittances through the banking channels as this will give them an opportunity to play a role in the development of their homeland. On our part, we will do everything to ensure that our exchange rate remains competitive and their remittances are transmitted efficiently to their destinations.

Establishment of Pakistan Savings

87. Mr. Speaker: I now turn to a number of new initiatives that we are taking to promote savings and investment in the country. First, we are transforming the National Savings Center into a corporation to be known as Pakistan Savings. It

will be run on commercial lines. Presently, the NSC is marketing only government securities through a network of some 320 branches. With significant reduction in return on fixed securities, brought about by the market conditions, small savers are feeling frustrated as they have no access to those securities that offer better return.

88. The new company will diversify its business by offering mutual funds of different kinds, which will be managed by professional assets management companies. Indeed, the company will facilitate access of individual investors to high yielding securities, which at present are beyond their reach. Depending on investors' appetite mutual funds of fixed and variable return securities can be offered. In this way, the company will enable small investors to access the capital market.

89. The company will play an important role in resource mobilization and increasing the availability of domestic resources for investment. It will greatly improve the quality of services as well as cater for broader national coverage than at present.

Pension reforms

90. The existing system of government pensions is quite unsatisfactory. The government commits for defined benefits without properly funding them. Subsequently, these defined benefits fail to keep pace with inflation and thus results in declining real pensions. Thus while we keep accumulating liabilities without proper assessment, the pensioners are not happy to see their pensions

losing value over time. In addition, pension contributions, which are one of the leading sources of savings, remain suspended from being injected in the economy.

91. With a view to reforming the pension system of the country a task force has been constituted to design a new pension scheme on the basis of defined contributions. The report of the committee will be available for consideration by 1 January 2005.

92. We are also taking steps to develop pension funds in the private sector. The Securities and Exchange Commission will soon be announcing separate rules for the establishment of pension funds by the Asset Management Companies, where both individuals and groups can contribute to well-structured pension funds. For this purpose, such Funds will be authorized to issue annuities. Insurance companies will also be offering pension products. These contributions will be exempt from the levy of income tax.

93. Mr. Speaker, we have adopted a pragmatic and prudent approach in promoting Islamic banking and finance in the country. State Bank has already given one license for Islamic banking and a number of banks are opening subsidiaries or branch operations exclusive based on the principles of Islamic finance. There remains an important gap in the field of insurance, which we plan to fill during this budget. Takaful, which is a Shariah compatible form of insurance, is being introduced in the country. The SECP will soon be issuing the rules for the establishment of Takful companies and the first license will be issued shortly thereafter.

94. Modoraba companies, which function on the basis of Islamic finance, have played an important role in the development of capital market. Of late, the process of formation of new companies under the Modraba Ordinance 1980 was halted for procedural reasons. The bottlenecks in this regard have been removed and SECP will be issuing new licenses after due processes of scrutiny of professional competence of prospective managers.

95. These measures will give a new impetus to Islamic finance in the country and meet the rising demand of such finance in the country.

96. Mr. Speaker, now I turn to the budget estimates for the year 2004-05 together with budgetary performance for the last year.

97. Mr. Speaker, in the current budget, a budget deficit of 4.0% was projected. I am pleased to inform that our actual performance on this important benchmark of fiscal management has been better as the revised estimate for fiscal deficit is 3.9%. In view of the high growth target of 6.6% fixed for next year, which calls for a much higher development spending, and the fact that a high degree of budgetary discipline has been already been achieved, it is proposed to slightly relax the fiscal constraint. Accordingly, for the next year we propose to keep the deficit at 4%.

98. Gross expenditure for the 2003-04 was budgeted at Rs.805 billion whereas the revised estimates are Rs.868 billion, which is entirely due to pre-payment of expensive foreign loans. For 2004-05 gross expenditure is budgeted at Rs.903 billion representing a marginal increase of 4% over the revised estimates last year. Of this, Rs.202 billion are provided for development expenditure, which represents a significant increase of 31% over the revised development expenditure for the current year. It will be seen that while containing current expenditure, we have substantially increased development spending.

99. We are conscious of the needs of country's defense which cannot be comprised for want of resources though such resources are utilized with utmost responsibility and economy. For the current year, defense expenditure was budgeted at Rs.160 billion whereas the revised estimates are at Rs.181 billion.

This increase is largely due to special operational needs to meet the threat perceptions developed during year. For the next year, defense expenditure will be targeted at Rs.194 billion, representing an increase of 7% over the revised estimates of 2003-04.

100. The poverty reducing expenditures are estimated at Rs.239 billion in 2003-04. For next year these expenditures are projected to rise to Rs.277 billion, representing an increase of 16%. This reflects government's commitment to gradually increase the overall resources for the common man.

101. On the revenue side, during the current year, total receipts were budgeted at Rs.728 billion whereas the revised estimates are Rs.761 billion indicating a significantly revenue collection performance. CBR performance was on target as it will achieve the projected amount of Rs.510 billon. Other tax revenues were budgeted at Rs.68 billion whereas revised estimates indicate Rs.70 billion. Thus the increase in revenue receipts is coming from non-tax revenues, which is likely to be Rs.181 billion against the target of Rs.151 billion. This is largely due to better dividend from public sector corporations, most notably PTCL and OGDC, and higher defense receipts. For the next year, we are setting an ambitious target of Rs.580 billon for CBR, which represents an increase of nearly 14%. For the non-tax revenues, a target of Rs.141 billion..

102. Provincial transfers from federal receipts were budgeted at Rs.215 billion, whereas the revised estimates indicate transfers of Rs.211, which is almost close to the target. Next year, provincial transfers are budgeted at Rs.239 billion, representing an increase of 13% over the revised estimates for last year.

103. These above estimates indicate that while maintaining fiscal discipline this budget has provided for investment and growth. It will thus serve to consolidate the economic gains already achieved and further the process of accelerated economic development. It will create jobs, provide for improved health, education and population welfare services and stimulate growth investment in the country.

Relief measures

104. The Government is cognizant of the fact that some segments of the society are in need of special relief. Accordingly, a number of relief measures have been adopted in this budget:

(1) The Pay and Pension Committee had given its award some time ago. It is time that a new study be undertaken to assess the need for revision of pay and pension of government employees so that a well studied decision can be taken. Accordingly, the Government is appointing a pay and pension committee which will submit its report within 6 months.

(2) However, in the meanwhile, there is need for ad-hoc relief to government servants. For this purpose, it is proposed to give an ad-hoc relief of 15% of pay to all employees of the federal

government. This will be adjusted in the light of the report of the pay and pension committee.

(3) An ad-hoc increase is also provided to pensioners of federal government, which will be adjusted in the light of the report of the committee. For pensioners, who retired prior to revised pay scales of 1994, the increase will be 16% and for others it will be 8%.

(4) To provide relief to pensioners and widows, a Special Savings Scheme was initiated. The current limit of Rs.l million on investment in the scheme is being raised to Rs.2 million. In addition, the requirement of depositing the amount in one tranche is dispensed with and investments can be made as desired by the investors. Furthermore, investors will have the freedom to transfer from one scheme to another. These measures represent a major relief as they will enable this special class to earn better return on their savings.

(5) House building loans from Housing Building Corporation are generally utilized by borrowers from low income group. To give relief to this group, it is proposed to freeze the amount owed as on July 1, 2004 for those whose time for repayment has expired. The outstanding frozen amount can be repaid over 36 equal monthly installments through post dated checks. This will alleviate the hardship of 38,000 borrowers which are mostly widows, retired persons and people from extremely low incomes. It is further proposed that for the remaining outstanding cases, where the repayment time in not expired, borrowers will be allowed to repay the amount in equal installment in remaining period of loan through post-dated checks. For such loans, the rental charge will be

reduced from 18% to 10% effective July 1, 2004. This concession will provide relief to another 125, 000 borrowers of HBFC. (6) Presently, domestic TV holders are required to pay TV license fee of Rs.300 per annum in lump sum. This system burdens the TV set holders by requiring bullet payment and the discomfort of payment after standing in long queues. In order to lessen this burden and to create ease for payment, it has been decided that this fee will be collected in 12 equal monthly installments of Rs.25 each through domestic electricity bills from those whose monthly consumption of electricity exceeds 100 units. This scheme will not be applicable for FATA, PATA and AJK.

105. Mr. Speaker, now, I place before this august house the proposals relating to tax policy and tax administration. The government las consciously pursued and continued the tax reforms and tax administration program initiated a couple of years ago. Today we have a highly simplified tax regime, with few taxes, broadened base, efficient system of dispute resolution and an outlook that is taxpayers friendly. This is not to suggest that our job is over. There are many improvements that still need to be done and we are conscious of those and taking steps to accomplish them.

106. Before I move to specific tax proposals, let me at the outset, inform the House the steps we have taken to further the process of reforms in tax administration, which is presently the primary focus of our effort.

Income Tax

107. Mr. Speaker, we introduced a new path breaking income tax law in 2001. This law has provided for self assessment, minimization of discretionary powers of tax authorities, gradual elimination of presumptive and non-adjustable withholding taxes, introduction of audit as the main instrument of discouraging misreporting and removal of discrimination among different classes of taxpayers. I am pleased to inform the House that all the income tax returns filed by over 1 million taxpayers stand accepted under self assessment, without any condition of the quantum of income or tax, except around 25,000 taxpayers which have been selected for audit. The percentage of cases selected for audit is not even 2%. I can proudly claim that with the advent of universal self assessment scheme, Pakistan

has achieved the distinction of having one of the most modern reformed taxation systems.

Large Taxpayers' Unit

108. To facilitate taxpayers, a large taxpayers' unit was launched at Karachi w.e.f 1st July, 2002. The unit which started with 300 cases is now functional with 600 large companies of Karachi and is acclaimed as one of the best large taxpayers' unit in the region. Besides increasing revenues, the unit has created confidence and trust amongst the taxpayers as cohesive and focused teams of facilitators and collectors have been appointed to handle these cases. Encouraged with the success of LTU Karachi, another LTU is being established at Lahore and shall be functioning by the end of August 2004. The third LTU will be established at Islamabad in 2005 for which the work has already started.

Medium Taxpayers' Units

109. Encouraged with the success of Large Taxpayers' Unit in Karachi, a Medium Taxpayers' Unit was established at Lahore during last year with 10,000 cases which is now expanded to 100,000 taxpayers. On the demand of taxpayers, Medium Taxpayers' Units are being established during this year at Peshawar, Rawalpindi, Faisalabad, Quetta and Karachi. We are continuously improving the functioning of these units with emphasis on automation and friendly contacts with taxpayers. Already, we are seeing the better recovery from such administrative efficiencies.

110. Sales Tax is the tax of the future. It is already the largest contributor to our revenues. Accordingly, the government has devoted itself to simplify procedures for administration of this tax in line with the true spirit of a value added tax and using the principles of risk management. The following measures are proposed for further improvement in the sales tax administration:

(1) The refund system for sales tax remains an area of concern. To reform the system we will categorize risk associated with such claims as reliable, average and risky. Payments will be made directly into the account of the claimant. The previous practice of part payments will be stopped and full amount will be paid in the approved cases.

(2) Sales tax registration will be handled by a Central Registration Office using an automated risk-based module. This will minimize contact between the department and the prospective sales taxpayers and pose minimal documentary and physical verification requirements.

(3) Presently, sales tax regime is defined by a multitude of notifications, general orders, instructions and rulings scattered over several places. To simplify the legal framework and encourage tax compliance through taxpayer education, a major effort has been undertaken to consolidate and update all such notifications and instructions into a singe document that would be easily accessible..

111. To facilitate speedy clearance of trade consignments a pilot project is being initiated at Karachi which will start working by the end of this month. It will have round the clock customs clearance and automated import and export clearance procedures under self assessment. There will be only selective examination of goods based on the concept of risk management.

Capacity Building

112. Introduction of modern concepts of tax management will not be possible without a motivated, dedicated and well trained professional workforce. Government is paying due attention to this aspect of tax administration. A number of programs of capacity building aimed at imparting comprehensive training to the officers and officials of taxation departments are currently in hand. In addition, CBR has prepared detailed job descriptions of each and every employee to monitor their performance and to improve the internal standards of accountability.

Taxpayers' Education

113. Taxpayer education plays a vital role in promoting a culture of voluntary compliance. A number of initiatives have been undertaken to allow easy understanding of tax regime in the country. All laws, rules, circulars, notifications and related material pertaining to income tax, sales tax, central excise and customs have been placed on website. Easy to read and understand special

literature has been prepared in the form of brochures, pamphlets and explanatory notes for the benefit of taxpayers. For the first time, all budget documents are provided to Honorable members of this House in the form of compact disks, which will also be available to anyone so desires. Taxpayers' facilitation centers are being established in all major cities to guide and assist taxpayers so that they can discharge their tax obligations. These centers will be duly equipped with such facilities like telephones, internet, photocopiers and computers all to help taxpayers.

Theme of tax proposals

114. Mr. Speaker, before I present specific proposals relating to various taxes, I would like to point out the major theme that runs through these proposals. It is to give a major stimulus to investment and growth in the economy, so that more jobs are created for our people and their incomes are increased. This will be possible if we reduce the cost of doing business and improve the global competitiveness of our industry. It is very unfortunate that Government has been contributing to the increased cost of business through its tax policy. It is not prudent that we demand high duties for import of plant and machinery or impose such duties on raw materials used by the industry. One can justify some protection for local industry, but when no such industry exists, imposition of high duties is not justified. Yet this was happening and we have decided to rationalize the tariff regime to correct this situation.

115. To remedy this, the following measures are being adopted:

(1) It is proposed to reduce customs duties on all types of plants, machinery and equipment not locally manufactured to 5%. In addition, there will be no sales tax and withholding tax, which were presently levied at the rate of 15% and 6% respectively, on the duty paid value.

(2) To maintain a level playing field, locally supplied plant, machinery and equipment is proposed to be zero rated under the sales tax regime.

(3) The multitude of administrative requirements that obstructed easy compliance with tax obligations has been eliminated. No longer will there be such things like surveys, installation certificates and indemnity bonds, all of which are proposed to be dispensed with.

116. Mr. Speaker, these measures will benefit both industry and agriculture and promote investment in these critical sectors. The capital costs will be reduced which in turn enhance competitiveness of investment projects. Although Government will suffer revenue loss of Rs.5 billion because of these measures yet we take this as our investment in future growth of our economy, which would yield rich dividends in the form of increased investment activity, job creation, improved living standards for our people, and ultimately enhanced revenues for the exchequer as well.

117. An equally important consideration underpinning our tax proposals is the need to improve the productivity of our agriculture, whose importance to country's economy I have already underlined. The current yield from agriculture sector is considerably low largely on account of low application of technical inputs such as mechanical power, fertilizers and pesticides.

118. As a reflection of our commitment to enhance farm productivity the following measures are being adopted:

(1) It is proposed to exempt sales tax on import of tractors, bulldozers, combined harvesters and on a number of other agricultural implements.

(2) A relief of Rs.100/- per bag in the price of phosphatic fertilizers is also being proposed.

(3) All imported machinery not manufactured locally has been exempted from customs duty, sales tax and withholding tax.

(4) Duty exemption is also proposed on raw materials for local manufacture/formulation of agricultural pesticides.

(5) Duty reduction on import of agricultural tractors in CBU condition, not manufactured locally, from 30% to 10% as well as reduction of withholding tax from 6% to 2% is also proposed to encourage productivity in agricultural sector.

(6) In addition, reduction in withholding tax on import of certain types of fertilizers from 6% to 1% is also proposed to reduce the cost of fertilizer inputs.

(7) All agricultural machinery manufactured locally is also exempted from sales tax. Application of 10% excise duty on imports is being provided as protection to local manufacturers.

119. These are far reaching measures that would have a massive impact on the efficiency of agriculture sector. With this, farm incomes will increase as there will be a strong incentive for improved production. This will also benefit our people in low income groups whose majority resides in the rural areas.

Incentives for the construction industry

120. Mr. Speaker, I have earlier pointed out the significance of housing and construction sector, whose capacity to generate employment is very high. A number of measures have been adopted to further encourage investment in this sector. These include:

(1) Duty on the import of specified construction machinery not manufactured locally is proposed to be reduced to 5%.

(2) Paints and varnishes are essential items of this sector. It is proposed to abolish 10 per cent central excise duty on paints and varnishes.

(3) The facility of tax credit was provided through Finance Act, 2001 to any profit paid to a schedule bank or NBFC for housing scheme regulated by the SECP, on a loan or advance by Government or the local authority, where such loan is utilized for the construction or acquisition of a house. This facility is not available to private sector employees who obtain loan for the same purpose from their

employers. It is proposed to extend this facility to employees of statutory bodies and public limited companies listed on stock exchange as well.

121. I now turn to tax-wise proposals proposed to be introduced in the budget. Sales Tax

122. At the outset, I would like to announce a number of measures aimed at given relief in the sales tax regime.

123. Reduction in rate of sales tax: The sales tax regime was unnecessarily made complicated through the introduction of multiple tax rates. With a view to giving a significant boost to investment and to reduce consumer prices, it is proposed to reduce the rates of sales taxes, unify the tax regime and reduce the need for tax refunds.

124. About 228 tariff lines were subjected to higher levy of sales tax at the rate of 20% which not only increased up front cost of industries, already facing serious challenges from cheaper competing imports but also gave rise to refunds in certain essential industries. It is proposed to abolish the higher tax rate 20% to provide relief to the consumers.

125. In addition, the other effective rates of sales tax, namely 18% and 23% also created cash flow problems for the industries. Accordingly, it is proposed to maintain a single rate of sales tax of 15% and do away with the concept of higher rate of sales taxes of 18%, 20% and 23%.

126. This measure is a credible measure which will have a salutary effect on efficiency of our industry as it will significantly reduce the cost of doing business, release the stuck up cash, remove the need to claim refunds and, above all, save the hassle of dealing with tax officials.

127. Abolishing Further Tax of 3%:: In order to remove a major trade distorting measure, it is proposed to abolish further tax, as it was an important factor in giving rise to "flying invoices" which subsequently contributed to inadmissible refund payments. Though, this levy contributes approximately Rs.9 Billion annually, its removal will encourage growth in textiles, steel, chemical, cement, beverages and a wide range of consumer items which would be freed from this additional burden. Moreover, it will directly contribute in reducing inadmissible refund claims and payments.

128. Mr. Speaker, this is yet another far reaching measure that we have adopted to give a major boost to economic activities in the country. Our exports oriented industries were particularly affected by this provision of sales tax, which added to their costs and reduced their competitive margin. With the abolition of quota regime under MFA regime our textiles exports need all the support to face global competition. This measure will meet this need. In addition, there are number of products locally consumed such as steels and chemicals, whose prices were increased because of this provision. We expect due reduction in the prices of these items with the removal of this tax, which will help both our industry to gain competitive advantage and consumers to obtain cheaper products.

(4) Exemption to civil society organizations, hospitals, and educational institutions: It is proposed to provide exemption from sales tax on imports/purchases of plant and equipment by civil society organization, hospitals and educational institutions. This measure will go a long way in improving the quality of health and education services and in encouraging the social welfare works of the civil society organizations.

(5) Revision of Sections 7 and 73: Keeping in view the need for documentation as well as adaptation of the law to business realities, it is proposed to substitute Section 73 in the Sales Tax Act, 1990 so that the practical difficulties in implementation are removed and the process of documentation of the economy continues smoothly. At the same time, it is proposed to amend Section 7 to allow registered persons to adjust input tax on accrual basis.

Other Measures

133. Now I come to some other measures proposed to be adopted in the budget:

(1) Removal of tax exemption on cottonseed: It is proposed to withdraw sabs tax exemption from cottonseed and crude vegetable oil obtained therefrom. Exemption of sales tax from cottonseed and its oil not only deprives the public exchequer of its legitimate revenue but also de-links the proper accounting of its consumption in the production of vegetable ghee/cooking oil. Accordingly, it is proposed to levy sales tax at the rate of 15% on supply of

enforcement resources on such taxpayers who are delinquent and involved in tax evasion. To implement this system, CBR has prepared new simplified forms for sales tax registration and returns to take into account the requirements of the taxpayers and to properly reflect their transactions. Carrying simple instructions for use, these forms are available both in Urdu and English to enable taxpayers to use whichever language the comfortable with.

Income Tax

135. Income Tax being an important tax of the future is capable to cater the needs of both economic efficiency and social equity. To achieve high standards of efficiency in the administration of income tax it constantly subjected to review and improvements. Our aim is to make this tax compatible with international best practices. With this in view, the following proposals are made for income tax in the budget:

(1) Relief on limit of taxable income: Basic threshold of income liable to tax was increased from Rs.60,000 to Rs.80,000 through Finance Ordinance 2002. Considering the rate of inflation and in order to provide relief to the lower income group it is proposed to raise the said limit to Rs. 100,000.

(2) Relief to the senior citizens: Our senior citizens with age of 65 years and above are allowed reduction in tax liability by 50% if their income does not exceed Rs.200,000. To give further relief to them the income limit is proposed to be raised to rupees three hundred thousand (Rs.300,000).

condition of mandatory payment of tax, which would facilitate dispensation of justice.

(6) Providing alternative dispute resolution: To provide an easy and efficient dispute resolution mechanism and to liquidate arrears of tax, an alternate dispute resolution forum is proposed by establishing Alternate Dispute Resolution Committee. These committees shall be represented by professionals from the private sector and senior tax officials from the income tax department. This mechanism will work without affecting taxpayers' right of appeal to settle as many pending matters as possible.

(7) Facilitation in Payment of advance tax: Companies and associations of persons were required to pay advance tax in four quarterly installments computed on the basis of tax turnover ratio for the latest tax year which invariably resulted in refunds and a burden on the cash flow of the business houses. To overcome taxpayers genuine problem it is proposed to allow payment of advance tax on estimated liability as opposed to tax-turnover ratio, which is being done away with. It is also proposed to allow associations of persons to pay advance tax on the basis of income assessed for the latest tax year and to bring them at par with individuals for which the limit of assessed income for payment of advance tax is proposed to be fixed at rupees two hundred thousands.

(8) Extension of exemption on capital gains: The capital gains arising on sale of shares of listed companies, modaraba certificates and PTCL vouchers are exempt until the tax year 2005. With a view to further encouraging investment in the stock market it is

proposed to extend the exemption to capital gains for another period of two years up to 30th June 2007. This measure will go a long way to improve investment environment in the country by inspiring confidence among the investors and brining more investors to the stock market.

(9) Rationalization of minimum tax for edible oil units: Ghee/ cooking oil units pay minimum tax at the rate of 3% on import of edible oil which is adjustable against final tax liability but if the final tax is less than 3% the minimum tax liability remains 3%. It is proposed to treat the same as final discharge of tax liability. To encourage local production of oil it is proposed that the ghee/cooking oil units may pay minimum tax at the rate of 1% on locally produced oil as final discharge of tax liability. It will encourage local production of edible oil and act as an incentive for the ghee mills to purchase locally produced edible oil.

(10) Relief on import of DAP: As further measure to boost agriculture productivity, it is proposed to reduce the withholding tax on import of DAP from 6% to 1%. This will help reduce prices of DAP.

(11) Relief on import of tractors: Similarly, it is proposed to reduce the withholding tax on import of tractors in CBU condition from 6% to 2%. This measure will improve the availability of tractors which are presently in short supply.

(12) Increase in the limit of property income for the purpose of withholding tax: Withholding tax on income arising from property is collected at the rate of 5% where annual rent is Rs.200,000 or more. To give incentives for investment in housing sector, it is proposed to enhance this limit to Rs.300,000.

(13) Provision for consumer loans: At present, banking companies are allowed to create a reserve at the rate of 3% of their income arising out of consumer loans for allowing off-set of bad debts arsing out f such loans. It is proposed to extend this benefit to NBFCs and HBFC as these institutions are also engaged in similar business. This will impact positively on the availability of consumer credit.

(14) Withholding tax on payments made to non-residents on account of advertisement expenses: TV and satellite channels transmit their programs out-side Pakistan through a transponder in space and the business activity is controlled and managed from outside Pakistan. Payments for advertisements are made by local companies to these channels either through advertising companies or through their agents. It is proposed to impose 5% withholding tax in respect of payment to non-residents on account of such advertisements as final discharge of tax liability.

(15) Finality of withholding tax on certain commission income: Withholding tax on commission income of travel agents and insurance agents is presently imposed at 5% which is adjustable toward final tax liability. Moreover, no tax is collected on commission income of petrol pump operators. With significant growth in the industry administrative convenience warrants a simpler regime. It is proposed to collect advance withholding tax on their commission income at the rate of 10% and treat the same as final discharge of tax liability. In addition, withholding tax at the rate of 5% on commission income of indenting commission agents, advertising agents and yarn agents is proposed to be collected as final discharge of tax liability.

(16) Relief from mandatory withholding tax on import of machinery by commercial undertakings: At present an industrial undertaking can import machinery without payment of withholding advance tax on production of exemption certificate from the Commissioner of Income Tax. The commercial importers are, however, liable to pay advance tax at the rate of 6% on import of machinery and equipment. To encourage industrialization, improve investment climate and manufacturing activity, especially in the case of SMEs the agriculture sectors, withholding income tax on import of machinery for commercial purposes also is proposed to be allowed without payment of withholding tax.

(17) Carry-forward of minimum turnover tax: The concept of minimum turnover tax payable by a resident company if the tax liability is nil or less than 0.5% due to losses or low income is considered as a disincentive for the companies incurring genuine losses in the initial years of business or due to admissible depreciation. To help the newly established companies it is proposed to allow carry forward of un-adjusted amount of minimum tax for a period of 5 years for adjustment against future tax liability. If the amount is not adjusted in the said period of 5 yeas it would automatically lapse.

(18) Reduction in the rate of tax on delayed payments: In view of overall reduction in mark-up rates, the rates of additional tax for delayed payment of income tax and compensation for delayed payment of refunds is proposed to be reduced from 18% to 12% and from 15% to 6%, respectively.

(19) Exemption of written off mark-up from income tax: As a

conscious policy, government is promoting the industrial sector to combat unemployment in the country. Private sector has to shoulder greater responsibility in this regard. The revival of sick industry is of immense importance in the present and future scenario. State Bank of Pakistan has allowed banks to write-off mark-up on debt as well as principal amount of non-performing loans of sick industries under its Circular No.29 of 2002. To ensure that the written-off amount of markup on debt is not again subjected to tax, specific provisions in law are proposed to be provided so that the sick industries get real benefit of SBP decision.

(20) Relief to salaried professionals: Salaried taxpayers having monthly income of Rs.50,000 or more are taxed at normal rates whereby with increase of only one rupee in salary, all the perquisites and allowances become subject to taxation at normal rates resulting in some case huge difference in tax liability. This is impacting adversely on the incentives of highly qualified personnel contributing significantly towards the economic development of the country. Realizing this ground reality, it is proposed to allow some relief to such valued individuals so that taxation while maintaining its progressive character may not become an unbearable disincentive.

(21) Incentives for amalgamation of banking and non-bank financial and insurance companies: To facilitate the restructuring of the banking sector, amalgamation of banking companies and non-banking financial institutions under a scheme of amalgamation approved by the State Bank of Pakistan or by the SECP certain incentives provided that included transfer and carryforward of losses, benefit of expenses and tax rates etc. These incentives resulted in rapid consolidation of the banking sector. These incentives, which were to expire on 30th June, 2004, are proposed to be extended for a further period of two years upto 30th June, 2006. Similarly, it is proposed to extend this scheme to the amalgamation of insurance schemes with similar benefits.

(22) Introduction of the concept of group relief: Holding and subsidiary companies under the SECP law furnish group accounts every year as per the International Accounting Standards but unlike in the advanced countries the concept of "Group Relief to set-off losses between group companies is not there in the Income Tax Law. As a major step toward strengthening corporate governance in the country it is proposed to introduce the concept of "Group Relief whereby a holding company acquiring or having 75% share capital of its subsidiary company can claim losses surrendered by the said subsidiary for set-off against its income for a period of three years provided the subsidiary company continues the same business for five years and the holding company retains 75% or more share capital for the same period.

(23) Introduction of a new form for filing income tax returns: With the introduction of universal self assessment scheme, certain information that are currently sought in the income tax return are no longer required. There were also requests from business and industry that the existing return needed further simplification and brevity. To facilitate taxpayers, it is proposed to introduce a new

Customs duty

136. Mr. Speaker, as I mentioned earlier, it is ironic that our tax policy has for too long contributed to increased cost of doing business in Pakistan. In the emerging global trade regime, our industry would not be competitive if these undue burdens imposed on its cost structure are not removed. We are very conscious of this situation. In the last five years, a large number of measures have been adopted to remedy this anomalous regime. These measures have resulted in a liberal trade regime where maximum tariff has been brought down to 25% and there are only 4 slabs making the regime extremely simplified. To reduce anti-export bias in our import policy, last year, we had reduced duties on nearly 5000 items that had a very positive effect on our industry, which has registered a historic growth rate of 17.1%.

137. To further this process, we are taking a number of new measures that would enable accelerated growth in our industrial and agriculture sectors. These measures include:

(1) Reduction in customs duty on industrial raw materials: To

provide adequate incentives to local industrial undertakings, it is proposed to substantially reduce customs duty on raw materials used by industrial and agriculture sectors. Through a broad-based consultative process that covered all stakeholders, particularly Ministry of Industries and Production and all the representative bodies of business and agriculture, CBR has identified 469 such raw materials whose duties are sl