Calls for structural changes in tax reform that can improve fiscal scenario

Amid concerns over the pressure mounted by rising food inflation, the Reserve Bank of India (RBI) has expressed the view that addressing the supply-side issues would help tackle food price inflation.

RBI Deputy Governor Subir Gokarn said the supply system was not responding in line with the demand and this, in turn, was leading to inflation. “This is one source of pressure which needs to be addressed,” he added.

Mr. Gokarn was interacting with the members of the Federation of Indian Chambers of Commerce and Industry (FICCI) here on Tuesday. Unlike the situation in 2003-08, the “golden period”, when the economy was buoyant, the government was spending more on consumption and subsidies rather than capacity on building. The gross investment would not go up unless the situation was reversed, he pointed out.

The investment in the economy dropped from 38 per cent in 2008 to 32 per cent in the post-crisis period in spite of the continuance of risks in the global economy, calling for improvement of situation on the domestic front. In this context, he said one of the dilemmas was whether to pass on the high cost of energy, largely on account of oil prices, to users. “It's a trade off. You have to pay the price in terms of high fiscal and current account deficit if the fuel has to be kept cheap to users,” he said.

The situation, according to the RBI Deputy Governor, called for structural changes in tax reform in the form of GST (Goods and Services Tax) that could improve the fiscal scenario by bridging the gap between revenue and expenditure. Though there were concerns about GST, the new tax regime would do at the national level what the VAT did at the State level to improve revenues, he said.

Apart from high gold and oil imports, decline in the production capacity and loss of competitiveness of domestic industry in exports were resulting in widening of the current account deficit. Gold imports alone were $60 billion during the previous fiscal.

He said the RBI was conscious of extreme volatility in rupee and had variety of tools to guard against fluctuations. However, widening current account deficit and negative balance of payments continued to be worrisome as it could limit the bank's ability.

Addressing reporters later, Mr. Gokarn said the outcomes of recent policy initiatives were in line with the central bank's expectations and growth was expected to be slightly better this fiscal. “Risks, however, continue to be high in the form of commodity prices, leaving little room for interest rates,” he said.

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