PM's advisers see current a/c deficit worse than in 1991

Want govt to raise excise duty and service tax rates, cut subsidies

The Prime Minister’s economic think tank on Wednesday painted a disappointing twin deficit picture for the economy and wrote a hard prescription. It wants the Centre to raise excise duty and service tax rates by two percentage points, decontrol diesel prices and prune subsidies to cut the fiscal deficit. The PM’s Economic Advisory Council (PMEAC) has asked the government to narrow the current account deficit (CAD) in the range of 2-2.5 per cent of GDP from a level worse than during the 1991 BoP (balance of payments) crisis.

As exporters face an adverse external environment, the PMEAC has pegged the CAD at 3.6 per cent of GDP for the current financial year, worse than three per cent at the time of the 1991 crisis. Even for the next financial year, the PMEAC in its review of the economy for 2012-13 projected the CAD to come down to three per cent of GDP.

In the backdrop of the government struggling to raise revenues from disinvestment and direct taxes, PMEAC Chairman C Rangarajan said the fiscal deficit would cross 4.6 per cent of GDP estimated in the Budget for the current financial year, but did not give any precise figure.

In the first nine months of 2011-12, the fiscal deficit touched 93 per cent of the Budget estimates.

"The government should take such measures as necessary to raise the tax-GDP ratio, and act on some subsidies,” Rangarajan said, adding diesel prices could be decontrolled in phases and other oil and fertilizer subsidies curtailed.

He said an improvement in the tax-GDP ratio had to come from plugging loopholes in tax administration and raising excise duty and the service tax rate close to the pre-2008-09 level.

PMEAC member and noted fiscal expert Govinda Rao said if the excise duty and service tax rates were raised to 12 per cent, on a rough calculation an extra Rs 35,000 crore could be added to the exchequer. He also prescribed the introduction of a negative list for service tax and bringing tax provisions to plug loopholes such as the ones that gave rise to the Vodafone tax dispute. On the BoP front, of which CAD is a part, Rangarajan said, "For 2011-12, the BoP situation cannot be regarded as satisfactory." The falling export growth and a continued rise in import growth would widen the trade deficit in 2011-12 to a staggering $175 billion, 9.3 per cent of GDP. That would also widen CAD despite the trade surplus in services likely to come to its aid.

Bank of Baroda chief economist Rupa R Nitsure said, "Our dependence on oil is so high and now with the Iran crisis the price of crude has risen again. So, all the fundamentals face adverse conditions." Rangarajan wants the government to have a clear focus on facilitating capital inflows, especially equity. His comments assume importance in the backdrop of the government stalling its own decision to open multi-brand retail to 51 per cent FDI.

Rangarajan said a conducive external situation was required to make the economy grow nine per cent. The council pegged economic growth at 7.5-8 per cent for 2012-13. It pegged wholesale price-based inflation at 5-6 per cent for the same period.