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Govt may raise tax rates in Budget to help contain fiscal deficit: Plan Panel principal advisor Sen

New Delhi: The Indian government may raise taxes on several manufactured items in the upcoming Union Budget for financial year 2012-13, to contain India's large fiscal deficit and give the Reserve Bank of India room to lower interest rates for sustaining higher growth, the Reuters reported Friday citing Pronab Sen, principal advisor to the Planning Commission.

The hike in rates may be to the extent of a full rollback of the stimulus package, which was implemented in 2008 to contain the impact of the global recession on the Indian economy.

"One of the possibilities is full rollback of the stimulus that is almost 1% of the GDP (gross domestic product)," Sen said.

Under the 2008 stimulus package, which aimed to give around Rs 1.86 trillion boost to economy, the government cut excise duties, taxes and proposed to ease financing for certain economic sectors.

The rationalization of excise and services taxes alone can contribute up to 1% of India's economic growth, he added.

"There is space. The space is basically raising excise duties," Sen said.

India breached its fiscal deficit target for the full financial year 2011-12 in the first ten months itself with April-January fiscal gap at Rs 4.35 trillion, which is 5.4% more than the Rs 4.13 trillion budget estimate, the government data showed last month.

The government is widely expected to breach the 4.6% target by about 100 basis points as a slowing economic growth and higher populist spend hurt government finances.

The Reserve Bank of India (RBI) has on several occasions asked the government to bridge its fiscal deficit to help tame inflation, while recently indicating that interest rates have peaked after an aggressive 375 basis points increase in repo rate in 13 sequential steps since March 2010 till October 2011.

"Unless you have a fiscal correction happening it will not create the space for the RBI (Reserve Bank of India) to relax on monetary policy," Sen said.

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