By Manish Sharma

Finance Minister (FM) Pranab Mukhejee has his task cut out. The wily politician has been entrusted with a tough job of rolling back the economic stimulus without derailing growth. His ministry is under pressure to reduce the fiscal deficit, which is pegged at 6.8 per cent of the GDP and over 10 per cent if off-balance sheet items are taken into account. The fiscal profligacy of last year has left the public finances in disarray, forcing the exchequer to resort to deficit financing of Rs 4,000 billion.

Thus, the Union Budget to be presented next week could witness re-adjustment of excise duty rates from the level of 8 per cent to 10 per cent. In addition, the service tax rates could also be hiked. At present, service tax is charged at 10 per cent following a 2 per cent rebate in the stimulus package. The government had reduced the Cenvat rate for excise duty from 14 to 8 per cent in two rounds -- by 4 per cent in December 2008 and 2 per cent in February 2009. These measures were announced to counter the downturn in which a wobbling economy was trying to brace the financial crisis compounded further by a monsoon failure.

The fact that the economy is showing enough resilience of late has further given boost to a calibrated approach towards exit. Advance estimates for this fiscal pegged Gross Domestic Product (GDP) growth at 7.2 per cent, as against 6.4 per cent in 2008-09. The Index of Industrial Production (IIP), the measure of factory output, surged to a 16-year high of 16.8 per cent in December 2009. Exports too have registered a turnaround with 9.3 per cent growth in December.

The disturbing surge in inflation that rose to over a 13-month high of 8.56 per cent in January from 7.31 per cent a month ago perhaps point to the fact that the time has come for the FM to withdraw some incentives given out at the time of distress. Food inflation is now threatening to spread to the manufacturing items as well. With the central bank signaling the reversal of benign monetary policy with 75 basis points hike in CRR (Cash Reserve Ratio), the fiscal policy is likely to follow suit. Unlike last October, the FM and the Deputy Chairman of Planning Commission, Montek Singh Ahluwalia -- another key decision maker in the UPA government -- are unequivocal for a partial exit at this point in time. The Prime Minister's Economic Advisory Council (PMEAC) Chairman C. Rangarajan’s statement that “the budget can attempt a roadmap for exit” also set the tone for withdrawal of fiscal stimulus.

Two key reforms moves are still in deliberation stage, thus leaving the FM with no other choice than to resort to punitive measures like taxation. The discussion paper on draft direct tax code still requires necessary fine-tuning, and implementation of GST (Goods and Service Tax) has been postponed for another year. With the stock market moving into a bearish phase, the disinvestment programme of the government too is in jeopardy. The tepid response to the FPO (Follow-on issue) of power company NTPC that was supposed to kick-start the disinvestment exercise has put the Finance Ministry on the back foot. Also, the Cabinet Secretary’s comment regarding the 3G auction that revenue will get preference over timing has dashed the hopes of completion of auction this year. With mounting pressure from the Congress High Command to allocate more funds for the flagship social sector schemes, particularly the Rural Employment Guarantee Programme, and depleting tax revenues, the finance ministry can afford to play the spoilsport for India Inc.

Indiabiznews, February 22, 2010