The UPA government may not have too much of a leeway in giving big-ticket tax incentives to India Inc if it has to rein in fiscal deficit within, say, 6.5% of the GDP. An indication to this effect was given by Dr C Rangarajan, Rajya Sabha member and former Governor of the Reserve Bank of India (RBI).
Some tax incentives will be needed to revive economic growth and some expenditures may have to be enlarged. But when these changes are made, the government should take a view on what is the appropriate level of fiscal deficit they can show for this fiscal , he told ET NOW. He said the scope for a further cut in indirect tax rates may be limited. There is perhaps a case to raise indirect taxes , he added. Going by the Fiscal Responsibility and Budget Management Act, a law to ensure fiscal discipline, the target is to contain fiscal deficit at 3% of the GDP. But the target was missed in FY 09 due to the sharp dip in tax revenues. According to him, Indian firms may find it tough to raise money overseas and this will impact the exchange rate, he said in his convocation address at the Indian Institute of Planning and Management. The inability of Indian firms to raise funds abroad including trade credit puts pressure on the domestic banking system for more credit. It is necessary for the RBI to watch the liquidity situation and take monetary policy measures that are necessary from time to time . He reckons that India will see definite signs of recovery in the second half of 2009-10 and there will be a distinct improvement in growth in 2010-11 .