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GST will improve indirect taxation
July, 03rd 2009

Arvind Virmani , the chief economic advisor in the finance ministry, feels that introduction of goods and service tax (GST) would act as a major stimulus for the Indian economy. In an exclusive interview to ET Now , Mr Virmani said the reforms prescribed in the Economic Survey 2008-09 are meant to be implemented in the long term to counter the impact of global economic slowdown on the Indian economy. The man behind the Economic Survey is confident of the economys ability to withstand the slump, but is emphatic that the global economic situation would determine the speed of recovery. Excerpts:

What will be the impact of GST implementation?

Introduction of GST will greatly improve the quality of the indirect tax system and, therefore, make it possible to have higher resources on a sustainable basis, which will make the fiscal situation more sustainable. This reform will solve many a critical issue in the long run.

In the current global economic scenario, where do you see Indias growth chart?

Ive been saying that I expect a U-shaped recoveryin terms of quartersprovided the US economy bottoms out by September. Subsequently, there were other forecasts, primarily by internal financial institutions, that the US economy may not bottom out by March 2010. But now there is a larger opinion that the US economy will bottom out by September. Based on this view our judgement is that U-shaped recovery with an average growth of about 7% may take place in 2009-10.

What factors do you think support this optimistic growth?

This analysis was based on historical record of Indian economy. We looked at investment rate, savings rate and other aspects. The economy had moved to a higher level of investmentclose to 40%. The domestic savings rate was very highabout 38%. In normal circumstances, this is sufficient to give you a growth rate of over 8%. But these are not normal circumstances and, hence, the plus or minus 0.75% forecast error.

Is India a different case, while every country is putting up with gloomy numbers?

In many other countries increase in investment rate was not balanced by an increase in domestic savings rate. In our case, the savings rate has more than kept pace with the investment rate, with the result that the actual increase in savings level was more than increase in investment level. So given this and many other aspects weve suggested growth rate of 7%, which is a reasonable expectation.

By when you expect this global crisis to end?

I would expect any slowdown to be reversed by October. Both private investment and private consumption will tend to follow the U-shape pattern. Hence, it was absolutely essential to give fiscal stimulus and it is equally important to maintain that stimulus during the current year. Weve given the suggestions as a menu of possible reforms for the next five years. Its not an issue of next three months or a year.

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