The implementation of the Goods and Services Tax (GST) will help reduce government finances and thus boost growth, the Reserve Bank of India said on Friday.
The implementation of the GST would be a “critical reform” to catalyse growth, help to contain government finances”, according to Subir Gokarn, deputy governor of the country’s central bank.
“It will help to take that (deficits) off the demand pressures that we have seen contributing to inflation over the last couple of years and in effect create space for interest rates to come down,” he told an event here.
The GST will increase revenues on a sustained basis for the government, thereby limiting slippages, he said. This tax, likely to be implemented from April 2013, would rationalise indirect taxes and help remove price distortions due to multiple taxes currently.
Gokarn also stressed on the importance of the government’s finances in bringing down interest rates.
Dealing with inflation, he added, was important for returning to the high growth path.
The country’s economic growth slowed to 6.1 per cent in the three months to December — the weakest annual pace in almost three years.
On the other hand, inflation based on the wholesale price index rose at a faster-than-expected 6.95 per cent from a year earlier in February, as spike in vegetable prices stoked food inflation..
According to the central bank, the global economic conditions are likely to remain weak. Containing inflation is essential for recreating a high growth trajectory, he said.
The central bank will meet on April 17 to review the policy stance in its annual monetary policy review, and the jury is out if the RBI starts the rate reversal cycle.
After hiking interest rates for 20 months between March 2010 and October 2011, the central bank maintained status quo on rates for two consecutive policy reviews.
However, since January, the cash reserve ratio was reduced by 175 bps to 4.75 per cent to ease the liquidity crunch. As the RBI has viewed oil prices and government’s fiscal situation as key to inflation, economists now expect a slower rate reduction during the course of the year.
High oil prices and uncertainty over a credible fiscal roadmap have also led to hope for a rate cut in the April policy.
On his part, Gokarn highlighted the importance of the government’s commitment in bringing down fiscal deficit through rule-based policy.
The government is committed to fiscal consolidation, and its commitment to cap subsidies as a percentage of the gross domestic product (GDP) is the key, he said.
In the Union Budget 2012-13, Finance Minister Pranab Mukherjee said subsidies would be contained at 2 per cent of the GDP to curb expenditure — and thereby limit a rise in the fiscal deficit.
The government has pegged the fiscal deficit for 2012-13 at 5.1 per cent of the GDP.
High government expenditure and resultant fiscal deficit have fuelled inflation and hurt growth by crowding out private investment in the last two years.
Gokarn pointed out that unlike the earlier high growth period, the onus of spurring economic growth lies on domestic factors such as local investment and consumption in the wake of weak global growth.