The finance ministry today said that tax exemptions and concessions, which are estimated to cost the exchequer Rs 100,147 crore this fiscal, should be subject to a sunset clause so as to avoid rent seeking.
In a mid-year review of the economy, the ministry said the plethora of exemptions often create pressure groups for their perpetuation, besides distorting resource allocation and stunting productivity.
In the Budget for the current fiscal, the Finance ministry did away with eight, 68 and six exemptions in customs, central excise and service tax.
There is expectation that it would go further on this path in the forthcoming Budget. Earlier this year, the Revenue Department had published a list of select exemptions and concessions for a public debate.
On a broader ambit, the review, presented in Parliament by Minister of State for Finance S S Palanimanickam, made it clear that weak infrastructure continues to be the Achilles heel of the Indian economy.
It added that rapid improvements would require simultaneous action on three fronts - user pays principle becoming the rule rather than an exception, cutting down revenue expenditure including subsidies to create the fiscal space for enhancing public investment and appropriate financial sector reforms including the need to deepen the bond market.
The review also sends out positive signals on central government finances by stating that the mismatch witnessed in the first half of the current fiscal would even out in the second half of the year, proceeding more or less on budgetary lines.
It added the government was budgeting for a fiscal deficit target of 3.4 per cent of gross domestic product for the fiscal year 2007-08 and to 3 per cent the year after. The current year target is to contain it at 3.8 per cent of the GDP, while the revenue deficit has to be brought down to 2.1 per cent of GDP.
Buoyant economic growth can be expected to contribute toward augmentation of revenues and also to help indirectly in meeting the fiscal and revenue deficit targets specified as a proportion of GDP, the review adds.
The review added that maintaining the industrial resurgence observed since 2004-05 continues to be one of the prime policy challenges and added that there was a need to review the flexibility or lack thereof in the current labour laws.
Commenting on the disappointing performance of the agricultural sector, which grew by only 2.6 per cent in the first six months of current financial year, the review said the minimum support price mechanism has not delivered the desired results and failed to discover the market price.
There is a need for a clear separation of price support to farmers and procurement by the states on the one hand and subsidy to the poor citizens on the other, it added.