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‘Non-inflationary,growth-inducing Budget need of the hour’

The key challenge for the Indian economy is that of intractable inflation. RBI has raised interest rates seven times and tightened liquidity to contain inflation.

Written by Chandrajit Banerjee |
February 26, 2011 2:18:01 am

The key challenge for the Indian economy is that of intractable inflation. RBI has raised interest rates seven times and tightened liquidity to contain inflation. Hence,it will be important to deploy fiscal tools to further stimulate growth. Such fiscal measures must be aimed at increasing disposable incomes with steps to boost investment by industry. Capacity enhancement is also necessary to counter supply side constrictions.

The Budget must include non-inflationary initiatives for encouraging both consumer demand and investment plans. Raising indirect taxes could prove to be counterproductive from the inflation perspective as well as the growth angle. Bringing excise duties to their pre-crisis rates could hurt industry.

The Confederation of Indian Industry (CII) feels that excise and service tax rates should be allowed to continue at 10 per cent for the coming year,giving industry sufficient time to recover. The Central Sales Tax which is completely non-Modvatable,should be abolished,in line with the roadmap for implementation of GST.

Fiscal deficit will be more difficult to tackle,given the many charges on government revenues for social sector spending,subsidies,and other priorities. The finance minister had announced a commendable action plan for fiscal consolidation in the last Budget and adherence to this is vital. CII supports a fiscal deficit of 4.8 per cent for the coming year,a target that might seem a challenge since the one-time telecom revenue will no longer be available.

CII has made several suggestions in its pre-Budget consultations for expanding government revenue. Extending services tax to railways,unlocking Rs 2 lakh crores stuck in tax disputes,and disinvestment of PSUs could help add to revenues.

CII is also looking for steps that will encourage investment,particularly in growth-inducing sectors such as food processing and machinery. At a time of declining trend in FDI,overseas investor confidence needs to be boosted. Credit rating of India as an investment destination would hinge on action on fiscal consolidation and current account deficit. Permitting larger FDI presence in sectors such as defence and multi-brand retail would add to investor comfort. It may be time to do away with Press Note 1 regarding joint ventures between Indian and foreign companies.

A categorical statement on tax reforms would also add to overall confidence. Both GST and Direct Taxes Code would need time to implement since complex arrangements would have to be made for the switchover.

The author is the Director General of CII

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