15th March 2012,Thursday
India's businesses, already facing high interest rates and a global economic slowdown, worry that the finance ministry will ask them to shoulder a bigger tax burden in the budget set for release on Friday to trim the fiscal deficit.
After a drubbing in recent state elections, the government has little room to cut subsidies costing 2.5 percent of GDP. But without fiscal consolidation, the Reserve Bank of India will have a harder time lowering interest rates without stoking inflation.
Growth in Asia's third-largest economy is expected to dip below 7 percent in the current fiscal year ending March, the slowest pace in three years, while manufacturing may cool to 4 percent from 7.2 percent in the previous year.
TAX REFORMS:
Industrial chambers including the Federation of Indian Chambers of Commerce and Industry ( FICCI) and the Confederation of Indian Industry (CII) are lobbying hard for a delay in hiking tax rates but do not expect any major tax relief.
Prime Minister Manmohan Singh's economic advisory council, headed by former RBI governor C Rangarajan, wants to roll back fiscal stimulus by raising tax rates by about 2 percentage points on most manufactured products and widening the service tax net.
After the 2008 global financial crisis, govt approved a nearly $37 billion fiscal stimulus package, mainly tax cuts for industry, and this has not been fully withdrawn.
The trade groups may get little sympathy for their bid to delay reversal of tax breaks. Finance MinisterPranab Mukherjee has limited room to prune spending, while the federal tax-to-GDP ratio has fallen to 10.5 percent from near 12 percent in the year before the financial crisis.
However, to cheer up capital markets, Mukherjee may abolish the transaction tax on trading of shares. Fiscal consolidation might also please investors because it would be seen as paving the way for interest rate cuts by the central bank.
CUTTING SUBSIDIES:
Mukherjee, who says he is losing sleep over a rising subsidy bill, could try and tweak fuel, fertilisers and food subsidies while allocating more funds for education, health, farm produce and infrastructure like ports, railways and roads.
The government's draft legislation on food security, to provide subsidised food to nearly 60 percent of the 1.2 billion population, may take more time to get parliament's approval, and fuel prices could be increased outside the budget to trim the subsidy bill.
The total budget subsidy bill could touch $50 billion this fiscal year, against $32 billion a year ago, thus widening the fiscal deficit to more than 5.5 percent of GDP, well above the initial target of 4.6 percent of GDP.
The next budget is likely to show a fiscal deficit of near 5 percent of GDP in the fiscal year beginning April 1, with growth estimated at between 7.5 percent and 8 percent. Economists in a Reuters poll conducted in January pegged GDP growth at 7.9 percent.
India's businesses, already facing high interest rates and a global economic slowdown, worry that the finance ministry will ask them to shoulder a bigger tax burden in the budget set for release on Friday to trim the fiscal deficit.
After a drubbing in recent state elections, the government has little room to cut subsidies costing 2.5 percent of GDP. But without fiscal consolidation, the Reserve Bank of India will have a harder time lowering interest rates without stoking inflation.
Growth in Asia's third-largest economy is expected to dip below 7 percent in the current fiscal year ending March, the slowest pace in three years, while manufacturing may cool to 4 percent from 7.2 percent in the previous year.
TAX REFORMS:
Industrial chambers including the Federation of Indian Chambers of Commerce and Industry ( FICCI) and the Confederation of Indian Industry (CII) are lobbying hard for a delay in hiking tax rates but do not expect any major tax relief.
Prime Minister Manmohan Singh's economic advisory council, headed by former RBI governor C Rangarajan, wants to roll back fiscal stimulus by raising tax rates by about 2 percentage points on most manufactured products and widening the service tax net.
After the 2008 global financial crisis, govt approved a nearly $37 billion fiscal stimulus package, mainly tax cuts for industry, and this has not been fully withdrawn.
The trade groups may get little sympathy for their bid to delay reversal of tax breaks. Finance MinisterPranab Mukherjee has limited room to prune spending, while the federal tax-to-GDP ratio has fallen to 10.5 percent from near 12 percent in the year before the financial crisis.
However, to cheer up capital markets, Mukherjee may abolish the transaction tax on trading of shares. Fiscal consolidation might also please investors because it would be seen as paving the way for interest rate cuts by the central bank.
CUTTING SUBSIDIES:
Mukherjee, who says he is losing sleep over a rising subsidy bill, could try and tweak fuel, fertilisers and food subsidies while allocating more funds for education, health, farm produce and infrastructure like ports, railways and roads.
The government's draft legislation on food security, to provide subsidised food to nearly 60 percent of the 1.2 billion population, may take more time to get parliament's approval, and fuel prices could be increased outside the budget to trim the subsidy bill.
The total budget subsidy bill could touch $50 billion this fiscal year, against $32 billion a year ago, thus widening the fiscal deficit to more than 5.5 percent of GDP, well above the initial target of 4.6 percent of GDP.
The next budget is likely to show a fiscal deficit of near 5 percent of GDP in the fiscal year beginning April 1, with growth estimated at between 7.5 percent and 8 percent. Economists in a Reuters poll conducted in January pegged GDP growth at 7.9 percent.
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