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Rangarajan pitches for partial roll-back of stimulus

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EXIT STRATEGY: C. Rangarajan (right), Chairman, Economic Advisory Council to the Prime Minister along with Member of the Council Saumitra Chaudhuri
EXIT STRATEGY: C. Rangarajan (right), Chairman, Economic Advisory Council to the Prime Minister along with Member of the Council Saumitra Chaudhuri

Special Correspondent

Govt finances have come under severe strain and fiscal imbalance ‘is now a matter of concern'

Corrective measures should focus on expenditure

Suggests expansion of the base of service tax

NEW DELHI: In what may be a broad prescription for the government's economic policy road map ahead of the Budget for 2010-11, the Prime Minister's Economic Advisory Council (PMEAC) on Friday pitched for a partial roll-back of stimulus measures to usher in fiscal correction by scaling up excise duties and service tax and “adjusting” Central expenditure without hurting capital spending on infrastructure.

Briefing the media here after releasing the ‘Review of the Economy 2009-10' which projected a GDP (gross domestic product) growth of over 7.2 per cent this fiscal, 8.2 per cent in 2010-11 and 9 per cent in 2011-12, PMEAC Chairman C. Rangarajan said that since the expenditure stimulus was directed at augmenting consumption and not investment, the corrective measures must also focus on adjusting expenditure. “There is a case for adjustment of duties...adjustments are possible both on the revenue side and the expenditure side in order to bring down fiscal deficit,” he said.

Noting that government finances have come under severe strain and the fiscal imbalance “is now a matter of concern”, the PMEAC said: [The] Government cannot continue with the kind of large revenue and fiscal deficits recorded in the last two years and will have to initiate fiscal consolidation in the coming fiscal year (2010-11) itself …in the forthcoming budget to ensure fiscal sustainability, enable greater flexibility in monetary policy calibration, contain interest payments and to avoid upward pressure on interest rates.”

Alongside, in pursuing the exit strategy, the Council noted that since more of fiscal expansion was owing to an increase in expenditure than from tax cuts, the Centre's expenditure would need to be curtailed. At the same time, while some items of spending such as salaries and interest payments are committed and cannot be reduced, infrastructure spending is critical and the government will have to provide adequate viability funding. “Thus, there is no scope for compressing capital expenditure while undertaking fiscal correction”.

On the revenue side, while the Goods and Services Tax (GST) is unlikely to be implemented from the April 2010 deadline, the PMEAC suggested expansion of the base of service tax “by converting the selective taxation of services into a general taxation, unify the threshold and rate structure of CENVAT and service tax to introduce GST at the Central level. This along with inflows from disinvestment and spectrum auctions, it would be realistic to budget for a cut in the Centre's fiscal deficit by 1-1.5 per cent in 2010-11 without any adverse impact on economic growth.

Amplifying on the suggested roll-back of excise and service tax, PMEAC member Govinda Rao said: “Partially, we need to roll back and if you partially roll back, you need to unify (excise duty and service tax rates)…There is one possibility that you unify both the rates at 10 per cent. There is another possibility... that both be raised to 12 per cent.” Mr. Rao, however, made it clear that it was for Finance Minister Pranab Mukherjee to take a call on this issue in the budget.

As part of the stimulus package to industry to tackle the impact of the global meltdown, the government had reduced the excise duty from 14 per cent to 8 per cent and service tax from 12 per cent to 10 per cent.

On the whole, Dr. Rangarajan noted that a cut in fiscal deficit during 2011-12 by one per cent by outlay rationalisation and another 0.5 per cent from the revenue side would be a possibility.

On the issue of inflation, he said he would go by the overall projection of the Reserve Bank of India that it would more or less come down to 8.5 per cent by the end of the current fiscal.

However, the impact of food inflation, now hovering around 18 per cent, could spill over to other sectors by the next fiscal if adequate steps are not taken.

In this regard, the PMEAC has advised the government to ensure timely release of sufficient amount of foodgrains below prevailing market prices, plan for imports at the first indication of production shortfalls and develop better distribution channels. It also sought urgent steps to import white sugar (about 3-5 million tonnes) to meet the shortfall next fiscal.


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