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Union Budget: Approved in LS, RBI may lower interest

Moving a step forward on the much-awaited Direct Taxes Code, the government, on Tuesday, said one of its provisions aimed at checking tax evasion will come into force from April 1.

The General Anti-Avoidance Rule or GAAR seeks to target known arrangements of tax avoidance and tax an impermissible avoidance arrangement.

The proposed law will not harass honest taxpayers, but is aimed at tax evaders, Finance Minister Pranab Mukherjee told members of Lok Sabha on Tuesday, replying to the general discussion on Budget, which marks the completion of one of the three stages of passage of the Budget.

Moving on to fiscal consolidation, Mukherjee said, the government’s intent is to sharply cut fiscal deficit to 5.1 per cent of gross domestic product (GDP) for 2012-13 from a bloated 5.9 per cent, which will help the central bank take “appropriate steps” in April to lower borrowing costs and help revive the economy, which is expected to slow to 6.9 per cent this year from a high of 8.4 per cent last year.

“We can’t indulge in fiscal profligacy. We shall have to come back to the fiscal consolidation path,” Mukherjee said. He vowed to keep the subsidy bill within 2 per cent of GDP in 2012-13 and reduce it further in the coming years and continue with an austerity drive to cut wasteful spending.

 Warning of an adverse fallout of the European debt crisis and prevailing high global fuel prices, the Finance Minister sought the support of politicians on fuel pricing reforms to avert a bigger crisis. “Volatility of international prices will affect (inflation) to some extent,” he said.

  High fuel and food prices had kept headline inflation over 9 per cent in the last two years, prompting the Reserve Bank of India to raise rates 13 times between March 2010 and October 2011.

Ease food inflation

“Our interest rates are still high. When the next review comes, surely RBI, in consultation with the Finance Ministry, will take appropriate steps,” Mukherjee said, adding that supply constraints must be removed to ease food inflation. “Surely it will be possible to keep (inflation) at a moderate level. With monetary policy and fiscal policy moving in conjunction, it will be possible to address the issue.”

RBI will review its policy stance next on April 17 and economists perceive 25 bps cut in rates. Mukherjee defended his budget proposals of a moderate hike in excise duty and service tax to 12 per cent from 10 per cent earlier, saying, the alignment in taxes were necessary to move to the Goods and Services Tax in the future. Besides, he added that three years ago, the excise duty was lowered from 14 per cent to 8 per cent and now it has gone back to 12 per cent. 

He said the Budget for 2012-13 revolved around three parameters of achieving a domestic demand-driven high economic growth, fiscal consolidation and moderation in inflation in the near future and to achieve all that, he has to take steps announced in his budget proposals.

 Mukerjee also said that in order to have the food security act in place, the country needed high agricultural production, procurement and storage facilities in place at the earliest. Plugging the loopholes in the public distribution system was of utmost importance, he said.