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FM sees inflationary pressures rising
August, 27th 2009

Finance minister Pranab Mukherjee on Wednesday ruled out any further fiscal stimulus, but said inflation pressures would return by the end of the year. Mukherjee also admitted for the first time that the goods & services tax (GST) rollout planned for April 1 next year may be difficult to achieve unless all states came on board.

As far as fiscal stimulus is concerned, we have practically stretched ourselves to the maximum. We will know fully only at the end of the second quarter whether it has had some effect, Mukherjee said at an Idea Exchange programme hosted by The Express Group on Wednesday.

While the government is tackling the slowdown and the drought, Mukherjee saw other dark clouds on the economic horizon By end of the year, there should be some inflationary pressures. They are already having some effect, he said. The finance minister is also apprehensive about oil prices shooting up after December, when demand in the US and Europe is expected to pick up.

Inflation rose to -0.95% for week ended August 15 from -1.53% the previous week, according to data released on Wednesday. Analysts expect inflation to touch 7% by March.

Mukherjee said managing the governments borrowing programme and the fiscal deficit posed challenges, especially since buoyancy in tax collections is missing this year due to the slowdown. The government plans to borrow a total of Rs 4.51 lakh crore in 2009-10, taking the fiscal deficit to 6.8% of GDP. The Reserve Bank of India and the government have to ensure those borrowings do not crowd out the private sector, the minister stressed.

There will be pressure on the fiscal deficit and issues of how to manage and prevent (it). I cant take the responsibility of creating additional fiscal deficit. I will have to bring it back. I have fixed targets for 2010-11 and 2012-13, but I dont know how it will be managed. So far this year, I have taken an extra Rs 1,000 crore on diesel subsidy, he said.

Contraction in indirect tax collections and the slow pace of direct tax growth have aggravated the governments fiscal management programme. The buoyancy is not there in indirect taxes. Direct taxes are going on more or less at par. We cant have buoyancy in indirect taxes unless there is production, he reiterated.

Indirect tax collections fell by 28% to Rs 63,623 crore in April-July 2009.

From Rs 88,395 crore in the same period last year. Direct taxes rose 3% to Rs 73,990 crore in the same period.

Deflecting a question on whether RBI could cut rates further in light of the limited fiscal space, Mukherjee said he would urge banks to keep some headroom and provide credit to the private sector, especially in sectors like housing. (Banks) are simply not going to keep (liquidity) with themselves, and I would discourage them to put it entirely in government securities, he said.

On the GST, Mukherjee said though there is consensus among most political parties at the Centre, opposition in the states could hit its implementation. There has been substantial convergence of views, but there has been divergence also. I am hoping to manage the divergence of views. Most political parties on the floor of the House have agreed to GST. This will aid the legislative aspect, he said.

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