Exit strategy for stimulus after Q3/Q4 assessment

Finance Minister Pranab Mukherjee today hinted at a delay in introducing the uniform goods and services tax (GST), a key element of indirect tax reform, from the scheduled date of April 1, 2010 and said the government would decide an exit strategy for stimulus measures only after reviewing growth numbers for second and third quarters.

This marks the first formal admission that the governments target date for GST may be postponed. In a large number of areas, we have been able to arrive at a convergence of views. I am trying to stick to the time schedule but I will not be surprised if there is a slippage of a few months, Mukherjee said at the Hindustan Times Leadership Summit today.

Mukherjee will be meeting state finance ministers on November 10 to discuss the issue. States have expressed reservations about pushing through the new tax regime at meetings of the empowered committee of state finance ministers. After a meeting of the committee later today, its chairman and West Bengal Finance Minister Asim Dasgupta responded to Mukherjees observation saying, Our collective target is April 1, 2010, and on this we will have discussions with the finance minister."

Though Mukherjee was clear that he would not introduce reforms in pension and insurance merely on the strength of opposition support and would wait for consensus within the ruling United Progressive Alliance, he said the government would push reforms in both direct and indirect taxes through the new tax code and GST. He clarified that the direct tax code was right now only at the proposal stage, allaying doubts on the clauses related to capital gains tax and Minimum Alternate Tax.

He said his priorities were returning to a high-growth path, fiscal consolidation and inclusive growth.

The government's tax collection has taken a hit following a 4 per cent cut in the Cenvat rate earlier this year as part of stimulus measures. Coupled with increased spending, the targets under the Fiscal Responsibility and Budgetary Management Act have been missed and the country is estimated to clock a 6.8 per cent fiscal deficit in 2009-10.

This has made the Prime Minister's Economic Advisory Committee advise a re-examination of the stimulus measures which comprised Cenvat and excise cuts.

On rolling back the stimulus measures, Mukherjee said,"As far as we are concerned, I think I shall have to watch the situation for the progress in the second and third quarters. I may be in a position, I am not asserting that position, to articulate it (an exit strategy), sometime when Budget-day will come," he said.

Mukherjee said he would strongly advocate at the next weeks meeting of G20 finance ministers that countries should exit stimulus measures one by one depending on their economic situation instead of planning a blanket exit.

He said growth in India was likely to pick up from the October-December 2010 quarter and the country could return to 9 per cent growth in the next two years. He said agriculture was likely to fall 2 per cent growth owing to the impact of drought and floods in some areas. Overall growth, he added, would be in the 6 to 6.5 per cent range.