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Can't abandon stimulus measures yet

The Union Government announced three stimulus packages in 2008-09 which broadly consisted of reduction in excise duty and service tax rates and several incentives to exporters. MS Mani reports.

business Updated: Feb 20, 2011 22:47 IST
MS Mani

The Union Government announced three stimulus packages in 2008-09 which broadly consisted of reduction in excise duty and service tax rates and several incentives to exporters. The measures were intended to accelerate the demand for goods and services and thus propel economic growth. With the inflation hovering around 4.1% during February 2008, there were no major concerns of a liquidity overhang or of a cost push increase in prices and the key objective was to arrest deceleration in GDP growth.

The stimulus packages and other policy measures seem to have worked, with the economy registering a GDP (gross domestic product) growth of 8.9% in the first half of 2010-11. However, this has been coupled with spiralling inflation in the recent months, with the average rate in December at 8.4%. Some would argue that the growth gains have been frittered away at the altar of inflation.

The surging inflation could be attributed to the significant increase in international commodity prices in the past two years. The government is faced with the twin challenges of sustaining high growth and reining in the inflation rate.

As far as the tax proposals for the Union Budget, 2011 are concerned, the bigger challenge for the Finance Minister lies on the indirect tax side. With prices spiraling out of control, the government would wish for a rollback of the excise duty rate reductions that can have significant impact on cost of goods and domestic demand.

Recent cuts in customs duties have meant that for certain products, it is cheaper to import than manufacture. Any increase in excise duty rates could further accentuate this disparity.

In fact, a reduction in customs duty on crude oil, imposed in Budget 2010, could reduce the prices of petro products given the increase in price of crude in the international market. Sectors such as steel, automobiles and their ancilliaries, which have shown significant growth in the recent past, would benefit from the continuance of the present duty regime. An increase in duty rates would be unwarranted.

Services, led by IT/ITES, is trying to get the growth momentum going after two years of reduction in clients' spending. Arestoration of the service tax rate may act as a dampener.

Exports incentives have ensured that exports are more competitive and improved the export performance. Discontinuance of these at this stagewould be counter-productive.

The government will be looking at appeasing the common man, who lately has not had much to cheer about and should aim to make the budget as painless as possible. Ground realities dictate that stimulus measures should not be withdrawn, though the reasons for their continuance are different from why they were introduced.

(MS Mani is a senior director with Deloitte Touche Tohmatsu India Pvt Ltd. Amit Sarker, senior manager, also contributed to the piece.)