In what is seen as the third stimulus package, External Affairs Minister Pranab Mukherjee, who is also holding charge of Finance, has announced a slew of indirect tax reductions and other fiscal measures to revive a rapidly slowing down economy. Estimated to cost the government Rs.30,000 crore by way of revenue loss in 2009-10, the package includes a 2 per cent cut in the median excise duty and service tax rates— down from 10 per cent to 8 per cent. Besides, the 4 per cent across-the-board reduction in excise duty announced as part of the first package in early December has been extended beyond March 31, 2009. States will not be penalised for having to borrow, up to certain limits, for investment in infrastructure and other employment-generating schemes. The first stimulus package was estimated to cost Rs.30,000 crore including an additional plan expenditure of Rs.20,000 crore. Much of the second package announced in January related to the domain of the Reserve Bank of India and contained very few fiscal measures.

The latest package has come barely a week of the presentation of the interim budget that was singularly devoid of significant interventions by way of tax reliefs or other demand-stimulating measures. This was then projected by official spokesmen as a conscious decision by the government and attributed to two factors. The first was the traditional practice — adopted by governments on the eve of a general election — of leaving major changes in taxation and other policies to the successor regime. However, neither that argument of sticking to convention and probity nor the second, and even more likely, reason of the absence of fiscal space has deterred the government from coming up with major cuts in indirect taxes now. If only these measures had been announced in the interim budget, the public mood and market sentiment would have been buoyed up. The deteriorating state of public finances is seen from the budget figures. For 2008-09, the estimated revenue is at 4.4 per cent and the fiscal deficit at 6 per cent of the GDP — sharply higher than the budgeted 1 per cent and 2.5 per cent. The consolidated fiscal deficit of the Centre and the States including the off-budget items is estimated to be close to 11 per cent. The Centre is already facing a shortfall of nearly Rs.60,000 crore in gross tax revenue as projected in the original budget estimates for the current year. It is certain that the new government will face a daunting task in bridging the deficit. Not surprisingly, the weakening fiscal situation has prompted Standard and Poor’s to downgrade the outlook on India’s long-term sovereign credit rating.

Corrections amp; Clarifications

In the Editorial "In small doses" (February 26, 2009), the second sentencein the first paragraph read, "Estimated to cost the government Rs.30,000crore by way of revenue loss in 2009-10, the package includes a 2 per centcut in the median excise duty and service tax rates - down from 10 per centto 8 per cent." Excise duty was cut from 10 per cent to 8 per cent, andservice tax from 12 per cent to 10 per cent.

In the second paragraph, the word "deficit" was missing in the sentence,"For 2008-09, the estimated revenue [deficit] is at 4.4 per cent and thefiscal deficit at 6 per cent of the GDP - sharply higher than the budgeted 1per cent and 2.5 per cent."