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Economists caution FM on stimulus roll-back
January, 16th 2010

In the midst of an ongoing debate over the timing of even a partial withdrawal of the fiscal stimulus measures, economists on Friday sounded out a general caution against an early exit as the economic recovery was still fragile.

Alongside, however, the economists felt that the government should start the process of fiscal consolidation by taxing all services at a rate on a par with excise duty.

Interacting with the media after a pre-budget meeting with Finance Minister Pranab Mukherjee, National Institute of Public Finance and Policy (NIPFP) Director Govinda Rao said: We may have to continue [with the] stimulus [measures]...At the same time, we have to control [the] fiscal deficit.

The general consensus among the economists participating in the discussions was that the stimulus packages should continue for some more time until the economy is on a firmer footing. I would say that the general trend of the people was [that] it is not the time to withdraw the stimulus. It is the general feeling of the economists, former Chief Economic Advisor Nitin Desai said.

Starting December 2008, the government had injected three stimulus packages to combat the domestic slowdown in the wake of the global financial crisis. Among the duty cuts and other sops put in place to spur the sagging economy, while the excise duty was slashed from 14 per cent to 8 per cent in two phases, the service tax was also reduced from 12 per cent to 10 per cent. Alongside, Plan expenditure was stepped up to provide a boost to various sectors of the industry.

As a result, while the Centres fiscal deficit rose steeply and is budgeted at 6.8 per cent of the GDP (gross domestic product) for 2009-10, the steps yielded dividends by way of a surprisingly better-than-expected 7.9 per cent economic expansion in the second quarter of the fiscal.

In the event, asked if any tinkering with the excise rates was possible for mopping up higher revenue so as to bridge the high fiscal deficit, Mr. Rao noted that a hike in the excise rate from 8 per cent to 9 per cent should be coupled with a lowering of the service tax from 10 per cent to 9 per cent to bring the two levies on a par.

If you have to increase excise, cut down services [tax] to merge the two rates at 9 per cent. Then, you have goods and services tax at [the] manufacturing stage, he said.

As for the aspect of fiscal consolidation, it could be achieved partially by taxing all services. Besides, there would be no arrears to be paid on account of the Pay Commissions recommendations next fiscal while the spending on the farm loan waiver would also be less. This way, you can bring down fiscal deficit to 5.5 per cent of GDP without any difficulty [during 2010-11], he said.

Delhi School of Economics professor Partha Sen also viewed that the stimulus package should not be withdrawn hastily as the Indian economy is not out of the woods yet.

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