Budget 2012 should avoid sector-specific tax cuts: IMF

An increasing fiscal deficit (the difference between government revenues and expenditure) and slowing growth have certainly caused a heavy strain on the economy. Given the sluggish pace of growth and investments, some sections of India Inc have urged a cut in indirect tax rates in the Union Budget (to be presented on 16 March)to boost sentiment.

However, Laura Papi, division chief - Asia and Pacific department of the International Monetary Fund, told Business Standard that the current economic momentum does not warrant such cuts. First, inflation still remains a cause of worry and the recent decline is mainly due to a high base effect and that the RBI should not rush to cut interest rates.

“India’s high level of inflation shows that there is not a lot of excess capacity in the economy, and cutting now would add to price pressures … it is important to ensure that inflation comes down before reducing interest rates,” she said.

She further added that looking at high interest rates and the government’s already large borrowing requirements, the stimulus should be small and focused. However, the government should avoid sector-specific tax cuts as it distorts economic activity. Capital spending should also be a priority as removing road blocks to facilitate infrastructure is important, she added.

Overall, she expects this year’s fiscal deficit to exceed 5.5 percent of GDP, which will lead to an increase in interest rates, make investments more expensive and reduce the flexibility of the Reserve Bank of India in setting policy rates.