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There's case to trim direct tax rates:Kamath
February, 22nd 2008
The Indian economy has been witnessing growth rates of 9% and above for the past two years. Going forward, we have the potential to be one of the fastest-growing economies in the world for several years to come. In this context, the Union Budget will be crucial in defining the growth trajectory of the country.

A look at recent data indicates that there are signals of moderate slowdown in growth, especially in the manufacturing and consumer durables sector.

Further, with increasing uncertainty surrounding the global economy, particularly the US, there is a strong case for ensuring a relative insulation of the Indian economy to global factors.

Domestically, high interest rates and an appreciating rupee have created cyclical headwinds even at a time when headline inflation numbers have been within reasonable limits.

According to RBI, risks to inflation persist mainly on account of the incomplete pass-through of increased global fuel prices and the increase in the global food prices. In assessing Indias economic performance, we must recognise the importance of the services sector, which has been the primary growth driver over the last decade.

This sector has transformed Indias growth by directly leveraging human capital to build a robust knowledge economy. Ensuring a supportive environment for the continued growth of this sector must therefore remain a priority.

Given these factors, the Union Budget should adopt a pro-active stance towards promoting growth and stability. As a direct boost to consumer spending, the Budget should include some cut in indirect taxes on consumer goods, particularly in segments where the multiplier effects are high. There may also be a case for some reduction in the direct tax rates, particularly since direct tax collections, for the first time, have crossed indirect tax collections.

Over the past few months, the appreciation of the rupee has affected some export-oriented sectors, including some areas within the services sector. With the increasing importance of the external sector to the growth process, the finance minister should consider articulating the governments expectation and stance towards exchange rate management and guidance to industry to prepare itself in this context.

The Budget must continue to focus on infrastructure and social and rural sector development programmes. The 11th Five-Year Plan emphasises the need to rapidly develop infrastructure. Increased budgetary support to infrastructure projects and social development programmes will not only promote supply-side growth factors, but will also enable a sustainable and inclusive growth model. In addition, this will also enable further development of India as a knowledge economy.

Overall, I expect the Budget to act as a continuation of the growth-oriented policies adopted over the years while seeking to address certain challenges that may have an impact on economic conditions.

(The author is MD & CEO, ICICI Bank)
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