Jaitley hints at not raising tax rates in coming budget

Tuesday 27th January 2015 06:39 EST

India's finance minister Arun Jaitley hinted at not raising tax rates and providing incentives to manufacturing in the coming Budget while asserting that “structural changes“ will have to be made to get the economy to grow at 8-9%.

Hard-selling India to global investors at the World Economic Forum in Davos, he also promised a stable tax regime that will not come up with unreasonable demand and change taxes retrospectively.

“In terms of incentivizing manufacturing, it is very much on our agenda. Even though we had few days, during the last Budget we did give to ministry of micro small and medium enterprises (MSME), national investment and manufacturing zone (NIMZ) and so on because we wanted the sector to pick up and that priority is fairly high on our agenda,” he said speaking at a session on `India's Next Decade'.

While referring to various revenue sources for the government, including divestment, dividend and spectrum sale, the finance minister said as economic activity picks up, the government's capacity to raise revenue will also increase.

“I am not in favour of raising the rates of taxation as that could become counter-productive,” he told reporters. Jaitley expressed confidence that India was close to the point when investment will pick up as there are a large number of investors who are waiting to come in. “They only want to be doubly sure about the credibility of the decision making process and the stability of the policies,” he said.

Commits to strict fiscal plan

India will not stray from a plan to slash its fiscal deficit to 3% of the gross domestic product within two years, Jaitley said, despite top aides' advice to revive the economy with more infrastructure spending. Jaitley, who will present his first full-year Budget on February 28 for the 2015-16 financial year, said the current level of deficit was unacceptable. “We have a roadmap to bring it (fiscal deficit) down a little below 3% over the next couple of years and then we intend to maintain it,” Jaitley said.

The government is scrambling to contain the fiscal deficit at 4.1% of the GDP in the fiscal year ending March, after a sharp shortfall in revenue that forced it to rein in spending.

India's fiscal deficit touched Rs 5,250 billion ($85.09 billion), or 99% of the full year's deficit target, in November.

In his Budget, Jaitley is expected to announce subsidy cuts while allocating more for infrastructure, reflecting a rightward shift in thinking since Prime Minister Narendra Modi was elected in May. Falling oil prices have reduced the fuel subsidy bill and the government has roughly halved expenditure growth this fiscal year.

The government's top two economic advisers, Arvind Panagariya and Arvind Subramanian, have both advocated loosening deficit targets to allow public spending on infrastructure to jumpstart economic growth. India's economy is recovering from its longest slowdown since the 1980s, but demand and investment remain weak. Modi and Jaitley seem determined to spend more on roads and railways but, despite the views of their advisers, without breaking deficit commitments. The three top agencies place India on the lowest rung of investment grade for its debt.

Jaitley said the government wanted to reduce subsidies to around 2% of GDP, and transfer funds to other sectors.“That is the area where we intend to move, to cut down some part of the expenditure, to finance our activities.”

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