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The right cut: Indirect tax cuts would benefit all
February, 25th 2009

Pranab Mukherjee, the minister in charge for finance, has finally delivered his share of fiscal boost. By cutting excise duty and service tax by 2% each across the board, he can claim to have somewhat mitigated the criticism that he did nothing during the interim budget presentation recently.

Mukherjee cited constitutional niceties to support his decision not to make any changes in the existing tax structure. However, popular pressure appears to have got the better of the need to observe constitutional propriety. We see the current economic downturn as an exceptional situation which requires policy response on a regular and consistent basis.

So, Mukherjee need not feel any sense of guilt that he has gone against his essential nature by announcing indirect tax cuts within a fortnight of presenting an interim budget. The tax cuts would certainly help improve sentiment for both industry and consumers alike.

The finance ministry will sacrifice revenues of about Rs 30,000 crore with these tax give-aways. With this, the total indirect tax give-aways in the past few months would amount to Rs 70,000 crore this fiscal. This is about 1.5% of GDP. The only worry that remains is on account of the ballooning fiscal deficit. Given the nature of the current economic crises the consensus around the world is to err on the side of doing more than might be seen as reasonable in normal times. So any fiscal boost through tax cuts is welcome at this stage.

In any case, the government cannot do much in the next three months as the nation prepares for the general election. The next government takes over sometime after mid-May. Once a new government is in place, more comprehensive tax cuts could be undertaken to boost the economy. Pranab Mukherjee did the right thing by not touching direct taxes which would have required an endorsement by Parliament.

That could prove tricky as many allies of the Congress are politically in a hard bargaining mode. Their behaviour can become unpredictable in the event of a money Bill being brought to Parliament. Therefore, cutting indirect tax is politically safe. We can now expect the central bank to deliver some more monetary boosters in the months ahead as the inflation rate races downward.

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