Projecting over 8 per cent economic growth next fiscal, the Prime Minister’s Economic Advisory Council (PMEAC) pitched for raising duties in the Union Budget 2010-11 as part of the rollback of stimulus measures.

“Partially, we need to roll back (stimulus) and if you partially roll back…. There is one possibility that you unify both the rates (excise and service tax) at 10 per cent (and also raise both rates) to 12 per cent,” PMEAC Member Govinda Rao said here, but clarified it was not a suggestion to the Finance Minister.

He was speaking after release of the Economic Review by PMEAC Chairman C Rangarajan.

Expressing concern over rising fiscal deficit, which is estimated at 6.8 per cent this fiscal, the panel said it was crucial to cut down on spending to bring in fiscal discipline.

“There is a case for adjustment of duties…Adjustments are possible both on the revenue and expenditure side in order to bring down fiscal deficit,” Rangarajan told reporters.

As part of the stimulus given to the industry to combat the global financial crisis in late 2008, the government had reduced the excise duty from 14 per cent to 8 per cent and service tax from 12 per cent to 10 per cent.

This pushed fiscal deficit up to 6.2 per cent in FY09 and it is expected to touch 6.8 per cent of GDP in FY10.

The PMEAC said growth in FY10 would beat 7.2 per cent and exceed 8 per cent next fiscal, and 9 per cent in the year after that. On inflation, the PMEAC suggested import of 3-4 million tonnes of sugar to meet domestic shortfall next fiscal.

Rangarajan said the proposed GST provides an opportunity for unifying excise and service tax rates.

However, Rao said excise duties can’t be raised to the pre-crisis level of 14 per cent, as the rate would be too high for GST.

The Review suggested expansion of tax coverage and unification of the rate structure of CENVAT, pegging it between the current and the previous level.

He further suggested the government should initiate fiscal consolidation measures in the forthcoming budget as the current level of deficit is unsustainable.

The fiscal deficit rose to 6.2 per cent of GDP in 2008-09 against the budget estimates of 2.5 per cent due to the government’s stimulus packages for the industry.

Rangarajan said it is possible to cut down fiscal deficit during 2011-12 by a per cent by outlay rationalisation and another half a per cent from the revenue side.

He, however, said the government should refrain from reducing outlay for the infrastructure sector to contain fiscal deficit “which is now a matter of concern”.

To a query, Rangarajan said he expects overall inflation to more or less come down to 8.5 per cent by this fiscal end, as also projected by the RBI.

The panel also expects the effect of food inflation, which is hovering around 18 per cent, to spill over to other sectors by next fiscal.

To avert such a situation, the Council wants the government to ensure timely release of sufficient amount of foodgrains below prevailing market prices, plan for imports at the first hint of a production shortfall and develop better distribution channels.

PMEAC advised the government to take urgent steps to import white sugar to the tune of 3-5 million tonnes to meet the shortfall next fiscal. Sugar prices rose over 58 per cent during the week ended February 6.

“Given the high international prices that are principally a result of the aggravated state of short supply in India, …There is hesitation to make such imports due to fear that when the material reaches Indian sores the price may be lower than the landed cost. It is therefore important that the government takes the initiative to start the process,” it said.

The PMEAC also pointed to the danger of rise in commodity prices. “India and China, as well as several other developing countries are showing strong signs of growth and their elevated domestic demand in combination with unsettled financial conditions have the potential of causing commodity prices to rise.”

The advisory body marked agriculture and power generation as major constraints of economic growth in the medium to long run. It wanted scale up of nuclear power generation following the Indo-US nuclear accord on civil supplies.

It expects more neutral policy from the RBI as economy improves, but said the central bank’s action will depend on many factors like inflation.

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