PMEAC asks govt to withdraw some stimulus in Budget

"We have to get back to the fiscal consolidation ... this means withdrawal of some of the stimulus," PMEAC Chairman C Rangarajan said while releasing the 'Review of the Economy 2010-11' report here.

Pointing out that significant portion of fiscal adjustment will have to come from additional tax revenues, the Review called for "continued attempts to reform tax administration, review the double taxation avoidance agreements and other measures to prevent flight of incomes to tax havens."

Finance Minister Pranab Mukherjee had started the process of rolling back stimulus measures last year and it is expected that in the forthcoming budget too some of the tax incentives would be withdrawn.

Mukherjee is scheduled to unveil the Budget for 2011-12 in the Lok Sabha on February 28. Pointing out that the withdrawal should be in stages, Rangarajan said, "I believe it is the time to move towards the process of fiscal consolidation. We clearly need to move in that direction."

Following the stimulus, which included tax incentives and raising public expenditure, the fiscal deficit shot up to 6.3 per cent in 2009-10. In view of the economic growth picking up, Mukherjee in 2010-11 Budget had raised the excise duty by 2 per cent to 10 per cent and increased Minimum Alternate Tax (MAT) from 15 per cent to 18 per cent.

As the economic growth rate is expected to pick up to 8.6 per cent in the current fiscal from 8 per cent a year ago, there is likelihood of government raising duties to contain fiscal deficit.

The fiscal deficit in the current year, according to PMEAC projections, is likely to decline to 5.2 per cent of the GDP against 5.5 per cent estimated earlier. As per the target set by the Finance Commission, government will be required to bring down fiscal deficit to 3 per cent of the GDP by 2014-15.

"With the current year's fiscal adjustment may not be a problem, the government faces formidable challenge of conforming to the Finance Commission's targets in the medium term", the Review added.