Excise and service tax collections continued to decline despite signs of a pick up in manufacturing and a general revival in the economic activity, bringing into question the strength of the economic recovery underway and weakening the case for any immediate withdrawal of the fiscal stimulus. The contraction in customs duty was, however, not surprising with imports still falling at over 30% rates in recent months.

Total indirect tax collections, including excise duty, customs and service tax, dropped 12.95% to Rs 25,495 crore in October 2009 over corresponding month last year. However, October collections look better when stacked against September 2009 mop-up, suggesting some improvement.

The month-on-month contraction in excise collection is particularly surprising given the strong evidence of pick-up in manufacturing, which had grown a strong 10.4% in August 2009, the latest month for which data is available. The manufacturing looks to be still doing well. October had witnessed strong cement despatches and automobile sales have touched highest ever in any month.

It may be too early to draw any conclusion on the trend, a finance ministry official said. The government had indeed cut factory levies to shield the country from the global financial crisis. That could be one explanation for the week excise collections. The financial services sector, one of the largest contributor to the service tax, has also shown some recovery. Another official in the ministry, however, said a detailed analysis was yet to be carried out.

But the overall contraction in service tax collections does not square with the official 6.5% estimate of national income or GDP growth in the economy. Services have an over 55% share in the GDP, measured at current price.

The governments total indirect tax collections for April-October 2009 are only 47% of the total budgeted collection from customs, excise and service tax levy for 2009-10. The lower than budgeted collection will put further pressure on government finances.

We cant continue to have fiscal deficit in the order of 6.8% of gross domestic product, Mr. Rangarajan said. We need to cut it by at least 1%-1.5% next (fiscal) year.But any premature withdrawal of the stimulus runs the risk of affecting the economic recovery.