PM's advisory body for gradual stimulus rollback in budget

A week ahead of the union budget, policy makers are increasingly rooting for a rollback of the economic stimulus with C Rangarajan, the chairman of the Prime Minister's Economic Advisory Council (PMEAC) calling for a phased rollback starting with the budget.

Releasing a review of the economy in 2009-10, Ragarajan said the economy would grow at 7.2 per cent with an upward bias as per Central Statistical Organisation (CSO) projections. However, the PMEAC report points to the need for a fiscal correction with the projected fiscal deficit rising to 10.3 per cent in 2009-10 and the debt-GDP ratio surging to 77 per cent compared to 71 per cent in the previous year.

Rangarajan said, the large deficits of the past two years were not sustainable. He added that while government must make efforts to reduce the deficits, it was desirable to reduce the expenditure-GDP ratio by 1 per cent.

The report calls for expansion of the service tax coverage, suggesting that the rate structure of the central excise and service taxation be unified, while putting it between the current and the previous higher level. The report proposes that all services be brought under the service tax structure to broaden the tax base while having a lower tax rate.

Prior to the introduction of the stimuli in 2008, the central excise rates were 16 per cent while the service tax rate was 12 per cent.

The same were reduced to 8 per cent and 10 per cent respectively in phases. According to Govinda Rao, member of the PMEAC, the government needs to raise the rates to a level like, say, 10 per cent or 12 per cent which could also serve as the rate for the proposed Goods and Services Tax (GST) when it is introduced.