The Prime Minister's Economic Advisory Council (PMEAC) on Friday came out in favour of an increase in excise duties and service tax in the forthcoming Union Budget since it views the soaring fiscal deficit as "unsustainable". In its report card on the Indian economy released on Friday, the PMEAC has projected a growth rate of 8.2 per cent for the Indian economy in 2010-11 and an even-higher nine per cent in 2011-12 on the back of strong growth in the manufacturing sector.
However, the "review of the economy 2009-10" document emphasises the urgent need for fiscal correction, which would entail both an increase in taxes and a cut in government expenditure to bring down the fiscal deficit by one to 1.5 per cent of gross domestic product (GDP) from 6.8 per cent now.
As part of the fiscal stimulus package to revive the economy in the wake of the global financial crisis, the government had reduced excise duty on all goods to eight per cent from 14 per cent and service tax to 10 per cent from 12 per cent. Government expenditure on infrastructure projects had also been stepped up to generate more demand.
But this, in turn, had caused the fiscal deficit to shoot up.
The review states that although the large fiscal deficits of the last two years have succeeded in spurring economic growth, "it is necessary to initiate measures towards fiscal consolidation in the forthcoming Budget to ensure fiscal sustainability, enable greater flexibility in monetary policy calibration, contain interest payments and avoid upward pressure on interest rates". "Partially, we need to roll back the stimulus and if you partially roll back... there is one possibility, that you unify both the rates (excise and service tax) at 10 per cent (and also raise both rates) to 12 per cent,"PMEAC member Govinda Rao said.
"There is a case for adjustment of duties... adjustments are possible both on the revenue and expenditure side in order to bring down the fiscal deficit,"PMEAC chairman C. Rangarajan told journalists.
The review has suggested an expansion of tax coverage and unification of the rate structure of CENVAT, pegging it between the current and the previous levels. Rangarajan said it is possible to cut down the fiscal deficit during 2011-12 by one per cent outlay rationalisation and another half a per cent from the revenue side.
He, however, said the government should refrain from cutting outlay for the infrastructure sector to contain the fiscal deficit.
The PMEAC review also expressed concern over inflation and said the effect of food inflation, which is hovering at around 18 per cent, could spill over to other sectors by the next financial year. In order to control inflation, the council has recommended that government should ensure timely release of sufficient amounts of foodgrains below the prevailing market prices from Food Corporation of India's (FCI) stocks, plan for imports at the first hint of a production shortfall and develop better distribution channels.
PMEAC advised the government to take urgent steps to import white sugar to the tune of three-five million tonnes to meet the shortfall in the next fiscal and bring down sky-rocketing prices of the sweetner.
The council has flagged agriculture and power generation as big constraints for economic growth in the medium-to longrun.
It wants the government to expedite the clearance of power projects and quicker implementation of nuclear power projects.
It expects a more neutral policy from RBI as the economy improves, but said the central bank's action will depend on many factors like inflation.
Source : India Today