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Some rollback of stimulus likely
February, 15th 2010

Finance minister Pranab Mukherjee may be propitiously placed to deliver a feel good Budget that does not tinker with direct taxes, aims to nurture growth and still slips in a dose of fiscal medicine by way of a small rollback of stimulus incentives.

The possibility of the Budget signalling a rollback of the four stimulus packages offered between September 2008 and April 2009 has been on the table for a while. But scales might be tilting decisively with industrial production for December 2009 hitting a record high of 16.8% and revenues on a growth curve.

The fear that withdrawing the stimulus may hurt growth that is still to take deeper roots has lessened over past week or so.

The worry that economy is still vulnerable and events abroad such as the Dubai crash might have a sudden impact remain but it is being felt that some of the crutches offered can now go. Government remains wary of political cost of the economys growth being jolted and this has meant that it is appreciative of central bank resisting calls for a revision of policy rates.

The confidence that restoring service tax and excise cuts may not prove premature seems to stem from the belief that demand is no longer fragile and will be driven by rising consumption.

The healthy rise in revenue projections is expected to strengthen with growth projected at 7.5% for this fiscal and Planning Commission deputy chairman Montek Singh Ahluwalia even speaking of an average of 8%. This is a comfortable position for Mukherjee despite the 2009 drought and a sharp fall in kharif rice production. It means he does not have to consider harsh measures like direct tax hikes.

Official sources anticipate that industry would not be pleased with any sort of withdrawal of slowdown related sops, but feels that government is ready to send out a signal on revenue giveaways. The Budget could be the right platform for this and the anticipatory protests are seen as part of a negotiating process with industry hoping to minimise the rollback.

The big jump in industrial production comes on the back of a flat period and is expected to settle down but there is a sense that the stimulus has worked in keeping private consumption and demand afloat. It could now be the time for industry to grab and ball and keep running.

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