PMEAC for hike in duties, return to fiscal discipline

Expressing concern over the rising fiscal deficit—which is estimated at 6.8% this fiscal—the PM's Economic Advisory Committee has said that it is crucial to cut down on spending to bring in fiscal discipline

Projecting an economic growth of over 8% next fiscal, the Prime Minister's Economic Advisory Committee (PMEAC) on Friday pitched for raising duties in the Union Budget 2010-11 as part of the rollback of stimulus measures, reports PTI.

"Partially, we need to roll back (stimulus) and if you partially roll back, there is one possibility that you unify both the rates (excise and service tax) at 10% (and also raise both rates) to 12%," PMEAC member Govinda Rao said, but clarified that his comment was not a suggestion to the finance minister.

He was speaking after the release of the Economic Review by PMEAC chairman C Rangarajan.

Expressing concern over the rising fiscal deficit, which is estimated at 6.8% this fiscal, the panel said that it was crucial to cut down on spending to bring in fiscal discipline.

"There is a case for adjustment of duties. Adjustments are possible both on the revenue and expenditure side in order to bring down fiscal deficit," Mr Rangarajan told reporters.

As part of the stimulus given to the industry to combat the global financial crisis in late 2008, the government had reduced excise duty to 8% from 14% and service tax to 10% from 12%. This pushed fiscal deficit up to 6.2% in FY09 and it is expected to touch 6.8% of GDP in FY10.

The PMEAC said that growth in FY10 would beat 7.2% and exceed 8% next fiscal, and 9% in the year after that. On inflation, the PMEAC suggested import of 3-4 million tonnes of sugar to meet domestic shortfall next fiscal.

Mr Rangarajan said that the proposed goods and service tax (GST) provides an opportunity for unifying excise and service tax rates. However, Mr Rao said that excise duties can't be raised to the pre-crisis level of 14%, as the rate would be too high for GST.

The Review suggested expansion of tax coverage and unification of the rate structure of central value added tax (CENVAT), pegging it between the current and the previous level. He further suggested that the government should initiate fiscal consolidation measures in the forthcoming budget, as the current level of deficit was unsustainable.

Fiscal deficit rose to 6.2% of GDP in 2008-09 against the budget estimates of 2.5% due to the government's stimulus packages for the industry.

Mr Rangarajan said that it is possible to cut down fiscal deficit during 2011-12 by outlay rationalisation. He, however, said that the government should refrain from reducing outlay for the infrastructure sector to contain fiscal deficit "which is now a matter of concern".

To a query, Mr Rangarajan said that he expects overall inflation to more or less come down to 8.5% by this fiscal end, as also projected by the Reserve Bank of India (RBI).

The Council also expects the effect of food inflation, which is hovering around 18%, to spill over to other sectors by next fiscal.

To avert such a situation, the Council wants the government to ensure timely release of sufficient amount of foodgrains below prevailing market prices, plan for imports at the first hint of a production shortfall and develop better distribution channels.
PMEAC advised the government to take urgent steps to import white sugar to the tune of 3-5 million tonnes to meet the shortfall next fiscal. Sugar prices rose over 58% during the week ended 6th February.

"Given the high international prices that are principally a result of the aggravated state of short supply in India, there is hesitation to make such imports due to fear that when the material reaches Indian shores the price may be lower than the landed cost. It is therefore important that the government takes the initiative to start the process," it said.

The PMEAC also pointed to the danger of rise in commodity prices. "India and China, as well as several other developing countries, are showing strong signs of growth and their elevated domestic demand in combination with unsettled financial conditions have the potential of causing commodity prices to rise."

The advisory body marked agriculture and power generation as major constraints of economic growth in the medium to long run. It wanted to scale up nuclear-power generation following the Indo-US nuclear accord on civil supplies.

It expects more neutral policy from RBI as the economy improves, but said that the central bank's action will depend on many factors like inflation.
 

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