After a pre-budget meeting with finance minister Pranab Mukherjee yesterday, India's top economists said they had urged Mukherjee to continue financial stimulus measures until the economy has firmly recovered. At the same time, they warned that the government should not drift away from the path of fiscal consolidation.
''The general feeling of economists is that it is not the time to withdraw the stimulus,'' former chief economic advisor to the union government Nitin Desai told reporters after the meeting.
Govinda Rao, director of the National Institute of Public Finance and Policy and member of the prime minister's economic advisory council, said the government may have to continue the stimulus, but at the same time should control the fiscal deficit by taxing services.
The fiscal deficit is expected to widen to 6.8 per cent this financial year. The government is targeting a deficit of 5.5 per cent of GDP in 2010-11 and 4 per cent in 2011-12. The fiscal responsibility & budget management (FRBM) Act requires the government to bring down the fiscal deficit to 2.5 per cent of GDP by 2008-09. However, this act has been put on the back burner since the financial crisis last year.
Rao said the government would be able to bring down fiscal deficit to 5.5 per cent of GDP without any difficulty next year, as arrears on account of the sixth pay commission award would not have to be considered, and the outgo on account of the farm loan waiver would be less.
Asked whether there is room for hike in excise duty, Rao said any change in excise duty should bring the rate on par with that of service tax. He said service tax should be brought down from 10 to 9 per cent and the excise duty be increased to 9 per cent from 8 per cent.