The Indian government has announced significant reductions in indirect taxes during the interim budget debate. The Indian government has announced significant reductions in indirect taxes during the interim budget debate.
Across-the-board 4% cut in CENVAT (announced in December 2008), customs duty exemption for Naphtha extended to FY2010. General rate on CENVAT cut to 8% from 10%; service tax rate cut to 10% from 12%.
Fiscal profligacy to cost India dear – S&P downgrades India sovereign rating. Gross fiscal deficit likely higher than 5.5% expected in FY2010BE. The government has estimated an additional revenue loss of Rs300 bn over and above the FY2010E budget estimates.
We feel, the priority of tax cuts over investment spending is misleading, as the latter would have provided a larger stimulus to the economy and also helped provide counter-cyclical support to rising unemployment. The demand impact of indirect tax cuts may turn out to be less than expected if growth and unemployment are impacted by the global slowdown. I hope you all agree that, the surest way to ensuring that growth, consumption and investment demand was through large public investment.
The export sector, especially segments such as textiles, leather and gems and jewelry that provide large-scale blue-collar employment opportunities needed a larger stimulus like interest rate subvention (i.e. interest subsidy) for a more meaningful stimulus for exports.
Overall, we don’t like to celebrate the half-heartened enthusiasm like some Investors on the Street.