With the Budget barely a week away, the Prime Minister's Economic Advisory Council on Monday made a case for withdrawing some of the tax incentives to the industry to put the economy back on track for fiscal consolidation.
The government had cut excise duty by six percentage points to eight per cent and service tax by two percentage points to 10 per cent when the ripple effects of the global financial crisis had hit the Indian economy in mid-September 2008, aggravating the fiscal position. The fiscal deficit during 2008-09 had crossed six per cent against the Fiscal Responsibility and Budget Management Act mandate of three per cent.
To put finances on consolidation, the government partially withdrew stimulus measures by raising excise duty by two percentage points to 10 per cent in the last Budget. “The process of fiscal consolidation has to start. Changes (stimulus) were made at the time of the global financial crisis. It has been over two years since then. We have to get back to fiscal consolidation. This means withdrawal of some of stimulus,” Prime Minister's Economic Advisory Council (PMEAC) Chairman C Rangarajan told reporters here, while releasing the council's review of the economy for 2010-11.(Click for graph)
Pointing out that the fiscal deficit outcome for 2010-11 could be marginally better than the budget estimates, PMEAC said budgeted level of fiscal deficit at 5.5 per cent of GDP and revenue deficit at four per cent remains beyond the comfort level.
It said the current year fiscal adjustment may not be a problem, the challenge was of adhering to the Finance Commission's targets with credible expenditure management. The Fiannce Commission had given a new roadmap for fiscal consolidaiton accordng to which the fiscal deficit should come down to 5.7 per cent during 2010-11, 4.8 per cent the year after, 4.2 per cent in 2012-13 and three per cent in the following year.
While Goods and Service Tax (GST) remains a contentious issue between the Centre and states, PMEAC suggested the Centre start the process to bring the states on board. It wants the Centre to prune the exemption list to the minimum, rationaise the rates of excise duty by converting the specific duties into ad valorem and unifying them with the general rate and extend service tax to all services.
With inflation still at the elevated level of 8.23 per cent in January despite moderation, Rangarajan said monetary policy has to play a role, even when inflation is supply-driven. He, however, refused to comment on whether the RBI should exit from monetary stimulus agressively or by taking baby steps. PMEAC expects inflation to be seven per cent by the end of this fiscal – higher than the 6.5 per cent it had estimated earlier – and attibuted it to the sharp rise in prices of vegetables like onion, tomato and brinjal.
Asked whether FDI in multi-retail branding will help bring down prices, PMEAC member Saumitra Chaudhuri said the country’s mandi system and storage facility require modernisation, both from domestic and foreign sources, and this could help provide competition to the current structure.