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Economic survey for tax cuts to boost economy

July 02, 2009 12:48 IST
Ahead of the Budget 2009-10, the economic survey on Thursday suggested tax cuts and increase in government expenditure as part of another stimulus package to help the economy overcome the global shock.

"The uncertainty surrounding the macroeconomic developments world over in 2009-10 and the need for minimizing the second round impact of the global shock calls for a continued fiscal policy stimuli," said the Economic Survey for 2008-09 tabled in Parliament on Thursday.

The survey said the next round of stimulus could include both tax cuts and increase in government expenditure.

"Within the proposed fiscal expansion, the mix of expenditure and tax cuts would be critical in the context of its impact on overall macroeconomic fundamentals like growth, interest rates and exchange rate," the survey said.

The survey said stimulus packages given so far were selective to address the affected sectors and promote investments that would not only boost demand in the short run but yield long-run growth dividends.

The three stimulus packages provided by the government have cut excise duty by 6 per cent, service tax by 2 per cent and raised planned expenditure, resulting in widening of fiscal deficit to over 6 per cent in 2008-09. 

The Interim Budget has projected fiscal deficit to be 5.5 per cent of GDP this fiscal, but the deficit has already widened to over one-fourth of the estimates in the first two months of this fiscal.

As such, the survey highlighted the need to return to the targets set by the Fiscal Responsibility and Budget Management (FRBM) Act at the earliest.

However, that may not be possible this fiscal, hence the survey said, "Needless to say it is an imperative to return to the FRBM targets for the fiscal deficit at the earliest, possibly by 2010-11."

As the FRBM targets were set till 2008-09, the survey called for FRBM II. "As the anchoring of the fiscal policy to FRBM Act has facilitated the government in pursuing medium-term growth and stability objectives, as apparent in the experience of last five years, it would be imperative to get back to the path of fiscal consolidation with FRBM II at the earliest."

The survey said the long-term fiscal policy stance beyond 2010-11 would emerge later this year when the 13th Finance Commission presents its report by October.

The FRBM Act mandated the government to cut fiscal deficit by 0.3 per cent every year to make it 3 per cent of GDP, and revenue deficit by 0.5 per cent to eliminate it by 2008-09.

It said a commitment to return to FRBM mandate at the earliest and quick reversibility of expansionary policies are critical for markets to attain high growth momentum

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