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The government will roll back fiscal stimulus on more than 300 products as it feels the economy, which is expected to grow by nearly 9 per cent in this fiscal year, is now in a far better shape.
Top finance ministry officials said most business houses and chambers of commerce were lobbying the government for keeping the tax sops doled out to guard the economy from the global economic crisis in 2008. However, finance minister Pranab Mukherjee feels the time has come to start winding down the stimulus measures.
In the wake of the global financial crisis, Indian industry had contracted for a few months, throwing millions of workers out of their jobs in textile and garment factories.
To stop the trend, the government had, two years back, provided tax benefits of Rs 40,000 crore in three tranches.
Some of the sops, including duty drawback and interest subsidy on select manufactures, were withdrawn last year. Besides, excise duty, which had been slashed from 14 per cent to 8 per cent in December 2008, was raised by 2 per cent to 10 per cent.
“We cannot continue with crutches for industrialists for all time. Some concessions will continue for the export sector but most will be withdrawn,” said top officials. Automobile industry executives say their discussions with finance ministry officials indicate that taxes on compacts and sedans can go up by 2 per cent.
The textile industry has been similarly lobbying to retain all the fiscal benefits given to them but fear some of these will be withdrawn. However, the finance ministry will have to brace for a tough time as the ministries of commerce, industry and textiles are expected to vigorously oppose much of the rollbacks.
The government hopes to raise around Rs 7,45,000 crore indirect and indirect taxes in this fiscal and wants to raise this target for the coming financial year (2011-2012) to nearly Rs 8,50,000 crore.
“While the bulk of the increase will come from direct taxes, indirect taxes will continue to be an important source of revenue,” officials said.
Over the last few months, most car makers and consumer durables firms have raised prices by 4-8 per cent putting additional pressure on overall inflation, which stood at 7.48 per cent in November.
However, despite hiking prices, car sales increased by nearly a third between April and November 2010. Most car makers, including Maruti, posted double-digit percentage growth in December.
“If car makers and others see a rise in demand even after raising prices, we don’t see why the government should be denied its taxes,” said officials.
The Reserve Bank has already rolled back its stimulus by ending the cheap money policy last year.
The RBI increased its benchmark interest rates by 1.5 per cent last year, the most by any monetary authority in Asia, to curb inflation, raising lending rates all around.
The finance ministry, too, thinks it is time to exit most of the stimulus as India “is less vulnerable to risky parameters, which beset Western economies”.
The need to withdraw stimulus measures also stems from the high fiscal deficit.
Fiscal deficit for the current year is expected to stand a little below the targeted level of 5.5 per cent, thanks to gains from the auction of 3G telecom spectrum and the sale of stocks in public sector companies.
“However, to slash it down to 4.8 per cent in the coming fiscal, every paisa of tax revenues will have to be accounted for,” said officials.