I am grateful to the Leader of Opposition for raising the issue of high taxation of petroleum products.  She is correct if taxes go down, the commodities will become cheaper and it will provide a great relief to the consumer.  It is precisely for this reason that my Government has undertaken the single biggest reform in taxation in the form of GST.  As a matter of fact, the principal opposition parties in their manifesto had promised that if voted to power, they will bring in GST. Implementation of GST depends on the cooperation and support of all political parties as constitutional amendments have to be made.  I do hope all the political parties who have expressed grave concern on the price rise and plight of 'Aam Admi' will convert this concern into real action by whole heartedly supporting GST. It's a win win situation for every one.

Inflation has been a matter of grave concern to the Government—more so, for me and my colleagues, Agriculture and Petroleum Minister who have had to take tough decisions in the face of shrill criticism from my friends on the other side of the House.

The Government has been fully aware of its responsibility and has taken determined steps since the end of last year to contain inflation.

In June 2010, the inflation as measured by the Wholesale Price Index (WPI) was10.6 per cent. Among the components, prices of food items rose by to 10.4 per cent, those of fuels by 14.3  per cent and those of manufactured products by 6.7  per cent. Both the aggregate indices and their components point towards pressure fromsupply side factors like food, fuel and commodity prices and demand side factors as the recovery becomes stronger and domestic capacity constraints in many sectors are being reached.

I must remind the hon'ble Members that inflation is a complex problem and it has to be handled with utmost care. In a democratic country, we cannot control inflation by law and decree. In the 60s, 70s and 80s, some nations tried to control inflation by having the government fix the prices. The predominant effect of this was disappearance of goods from the shops. In other words, goods were cheap but not available. At the same time, black markets flourished. We certainly do not want to create such a situation in India. Our priorities in this regard are as follows:

Goods especially food items should be easily available and accessible to people at large.

Remunerative prices be given to those producing and providing goods and services so that producers are encouraged to produce more.

To ensure that the goods including food items are  provided to vulnerable section of society at subsidised prices through an efficient and effective public distribution system.

In order to address the concern of Aam Admi, my Government has given them entitlement to work, information and education for their children backed by legal enactment. Rs 2,31,000 crore has been given to implement right to education which will be shared by Centre and States in ratio of 65:35 respectively.

A policy package has to be carefully crafted to contain inflationary pressures, maintain the growth momentum and restore the fiscal health of the economy.

Let me begin with the food prices. Inflation was very high at the end of last year and even at the start of this year. In the last week of November 2009, the weekly food price inflation stood at over 21 per cent. In February 2010, when I stood up to present the Budget in this House, food price inflation was close to 18 per cent. As a result of the steps taken by the Government, the food price inflation now has come down to 9.67 per cent !

Food prices rose sharply in the later part of 2009 because of the relatively weak south-west monsoon that year. The moderation in prices in response to a good Rabi harvest was gradual even when the harvest came into the markets. An important reason for this was that many of the crops like pulses which contributed significantly to the rising rate of inflation are grown only during the Kharif season. Prices of such crops were not appreciably impacted by the Rabi harvest.

The performance of the south-west monsoon so far this year has been very good. We are looking forward to a bumper Kharif crop and when larger supplies come in at harvest time, it will lead to significant fall in prices of food items.

I, as the Finance Minister, cannot afford to ignore the role of structural factors leading to high food prices. A recent study by NCAER indicates decreasing share of low income households and increasing share of high income households for the period 2001-02 to 2009-10. While 34.6 per cent households were in the low income category in 2001-02, the corresponding figure in 2009-10 is 17.9 per cent. For the same period, the percentage of middle income households has gone up from 58.0 per cent to 61.6 per cent. The high income households have risen from7.3 per cent in 2001-02 to 20.5 per cent in 2009-10. In absolute terms, in 2009-10, India has 46.7 million high income households as compared to 41 million low income households. The middle income households have increased to 140.7 million out of the total of 228.4 million Indian households.

As large numbers of households see their incomes growing as a result of sustained rapid growth, their food consumption patterns are changing. Households are consuming more and more pulses, dairy products, vegetables and sugar.

The entire agriculture system has to gear up to increase the productivity of food items. Growing demand is an inevitable consequence of rapid and inclusive growth.

In my Budget for the year 2010-11, I presented a four-pronged strategy of increasing production, reducing wastages, providing credit to the farmers and giving boost to the agro industry. We have to take the Green Revolution to the eastern region of the country, conserve the gains made in the green revolution areas and organize 60,000 pulses and oil seed villages at the earliest and create food storage capacities and cold chains to preserve food.

We have taken concrete steps in that direction. As a result of policy interventions, the area sown under all Kharif crops has increased to 758.67 lakh hectares from 698.10 lakh hectares last year. The area under foodgrains has increased from 340.61 lakh hectares to 368.36 lakh hectares. Area under pulses and oilseeds has gone up from 75.45 lakh hectares to 87.36 lakh hectares.

To put more money in the hands of farmers, the MSP of wheat has been increased from Rs.640 in 2004 to Rs.1100 per quintal in 2009 - an increase of 70%. Forpaddy, MSP has moved from Rs.560 to Rs.1000 per quintal - an increase of 79  per cent. The new Nutrient Based Fertilizer Policy is being implemented vigorously and is likely to show positive and early results in near future.

To increase production of pulses during Kharif 2010-11, the MSP of Tur, Urad and Moong has been increased substantially. For Tur, it has been raised from Rs.2300 to Rs.3000 per quintal, for Urad from Rs.2520 to Rs.2900 per quintal, Moong from Rs.2760 to Rs.3170 per quintal. As a direct subsidy, farmers have also been provided an additional incentive at the rate of Rs.5 per kg for these pulses sold during the harvest/arrival period of two months to designated procurement agencies.

To make the life of Aam Admi easier, we are taking pro-active steps to revamp the supply chains management. A package of measures including investment linked tax concessions, attractive schemes for encouraging investment in the creation of modern warehousing facilities and establishment of cold chains has already been put in place. We have accordingly amended the The Income Tax Act 1961 to encourage construction of more warehousing facilities by giving tax exemptions to those contributing for the same.

A committee of Chief Ministers has been set up which has been interacting regularly with the Prime Minister, Agriculture Minister and the Finance Minister to find prompt and effective solutions to the problems of agriculture and supply side management.

ANNOUNCEMENTS

Enhancement of allocation for APL families

The Central Issue Price (CIP) of foodgrains meant for the Public Distribution System has remained static since 2002, despite the increasing cost of procurement, in order to ensure food security. The CIP for rice is fixed at Rs 5.65 per kg for BPL and Rs 3 per kg for AAY and while wheat is at Rs 4.15 per kg for BPL and Rs 2 per kg for AAY. For pulses and edible oils, the Government of India is bearing a subsidy of Rs 10 per kg and Rs 15 per kg respectively for distribution of these items through PDS/Fair price shops.

Recently, the Government has also decided on providing, an additional allocation of 4.57 lakh tonnes of foodgrains per month for APL families at the prevailing APL CIP. This is applicable initially for a period of six months to those States where APL allocations are below 15 kg per family per month.

Increase in Guarantee period under the Scheme for construction of godowns through private entrepreneurs.

During last three years, the procurement of foodgrains has increased substantially in several States which has led to an increase in the requirement of covered storage space. The stock of foodgrains in the Central Pool was 583.55 lakh tonnes as on 1.7.2010. As a result, substantial quantity of wheat had to be kept in open in Cover and Plinth (CAP) storage. We have taken several steps to construct additional storage space for storage of procured foodgrains.

Government is releasing funds as equity to Food Corporation of India (FCI) and as grants-in-aid to the North-Eastern States, including Sikkim and J&K, for construction of storage godowns under a Plan Scheme. For the Eleventh Five Year Plan, Rs. 149 crores has been allocated for the purpose. Action is afoot to create 5.25 lakh tones of additional storage capacity in the North-Eastern States with an investment of Rs.568 crores.

However, the Plan funds are not sufficient to meet the additional storage capacity requirements. To bridge the identified storage gap, a scheme was formulated in July, 2008 for construction of godowns through private entrepreneurs. The identification of storage capacity is based on consumption requirement in consuming States and stock levels in procuring States. Additional capacity of 127.65 lakh tonnes has been identified in 15 States for construction under the scheme. Some more capacity is being identified in Decentralized Procurement (DCP) States. The scheme has also been extended to CWC and SWCs where they own land with a six year guarantee and about 8 lakh tonnes capacity is being constructed by them.

            To make the scheme more attractive, the guarantee is now being extended to 10 years. This will encourage private entrepreneurs to take up construction of new godowns under the scheme.

On the energy and commodities front, rising prices during the second half of 2009 and the first half of 2010 reflected the widespread perception that the global economy was out of recession and that the recovery, though slow, would be steady. Also, the rapid resurgence of growth in Emerging Market Economies (EMEs), especially India and China, would contribute to a firming up of demand for these goods.  The overhang of liquidity in global financial markets, which is constantly in search of higher returns also contributed to the re-emergence of energy and commodities as an asset class. These factors combined to accelerate inflation in these components of the WPI.

However, as we look to the second half of the 2010 and beyond, the global economic environment seems to have taken a turn for the worse. There are clear signs that the US recovery is weaker than earlier thought. Europe is dealing with its fiscal risks through aggressive austerity measures. Most significantly, China after busting out of its slowdown, is now again decelerating, at least partly in response to policy measures aimed at controlling a rapid real estate price build-up.

Given these developments, the outlook for energy and commodities prices is one of continuing moderation. To my mind, this should eliminate one significant source of pressure on prices.

From India's perspective, with particular reference to inflation management, these changes in global conditions offered an opportunity for undertaking pricing reforms in the petroleum sector. In fact, the recent increase in domestic petroleum product prices may well be more than off-set, as deregulated domestic prices adjust to a lower international crude oil prices.

Both these supply-side factors, therefore, point conclusively to a significant moderation of inflation over the second half of the current fiscal year.

The third contributor to inflation is pressure from demand. There is no question that the strong recovery, desirable as it is, has contributed to an acceleration of prices. The Reserve Bank of India has been sensitive to these pressures from January onwards when it began a calibrated adjustment of its policy stance to achieve two objectives. First, it needed to withdraw exceptional infusion of liquidity that had been made as a part of the stimulus packages. Then it needed to raise short-term interest rates to levels that would rein in demand, but not to the point of putting a sharp break on the ongoing recovery. The actions taken so far on both the liquidity and interest rate fronts are expected to have an impact on inflation during the second half of the current year.

To sum up, while recognizing that inflation reached unacceptable levels in the first half of 2010, it is expected that all the three major drivers will soften during the second half. Some of this is due to good fortune, some to a fragile global economy and some to a timely and appropriate policy response which will contribute to bringing inflation down without disrupting growth.

On GST, stated position

After careful consideration of the issues raised by the Empowered Committee of State Finance Ministers, we have revised our position to accommodate the concerns of the State Governments. The Central Government is willing to consider a phased approach for the introduction of GST. In a departure from its earlier stand, the Central Government is also willing to accept a dual rate structure in the transitory phase leading eventually to a "model GST".

The revised position on some of the key issues is as follows:

Exempted List

At present, 99 commodities are in the exempted list of VAT. States propose to keep these in the exempted list of SGST. The Central Government would align its exemption list with the State list and keep these 99 commodities as exempted commodities under CGST as well. Similarly, precious metals, bullion and other similar commodities are proposed to be taxed at 1% under CGST so that the 1% list is common both for SGST and CGST. The Centre proposes to shift the remaining commodities which are in the exempted category under Central Excise to the lower rate of the CGST.

Exemption Threshold

As has been agreed in the earlier meeting of EC, uniform threshold for all dealers with a turnover upto Rs.10 lakh per annum will be exempted both from CGST and SGST. The same threshold will apply to the services.

Threshold for compounding for small dealers

Ideally the threshold for compounding (option to pay tax at a fixed percentage of turnover without input tax credit) should be uniform for CGST and SGST at Rs.50 lakh per annum. However, Centre could consider a higher threshold of Rs. 1 crore if the States also agree to raise the limit.

Rate Structure

As you would recall in the meeting held on 13^th January, 2010, FM had clearly stated that the ideal position would be to adopt a single rate structure with a common rate for goods and services. However, to facilitate the introduction of GST regime by 1^st April, 2011, the Central Government proposes to keep CGST merit/lower rate for goods at 6% and standard rate at 10%. The services will be charged at 8%. Our request to the States will be to consider keeping the same rates i.e. the lower rate for SGST at 6%, standard rate at 10% and services at 8%. This mutually supportive approach will ensure that we have a single rate for CGST and SGST in the range of 12 to 20% in the first year of GST introduction. The peak effective rate will be about 15% which will be quite acceptable to the trade and industry. Eventually, it will settle down to a level of 16 to 18% for both CGST and SGST which will mean an effective rate of 12%.

In the second year of implementation of GST depending upon the revenue receipt by the Centre and the States and payment of compensation by Government of India to the States, the standard rate for SGST and CGST may be reduced to 9% retaining the lower rate at 6%. During the third year of implementation based on our experience and depending upon the buoyancy of revenue receipt and payment of compensation by the Government of India, the standard rate may be reduced to 8% and lower rate increased to 8% and services retained at 8% both for CGST and SGST. Thus, in a phased manner, we will be able to achieve a single CGST and SGST rate for both goods and services.