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Wider tax base can help lower deficit

New Delhi, Feb. 27: India can narrow down the fiscal deficit by widening the tax base and cutting the fuel subsidy and expenditure on welfare, defence and road projects, Economic Survey 2013 said today.

A cut in gold imports and lower current account deficit coupled with higher industrial growth will help to meet the country’s deficit target, said Raghuram Rajan, former chief economist to the International Monetary Fund (IMF), who became the top adviser in the finance ministry last year and has prepared the report that lists the challenges the economy is facing.

The government has struggled to contain the fiscal deficit, which has swelled because of costly oil subsidies and sluggish tax revenues, prompting global ratings agencies to warn of a credit downgrade.

In 2011-12, subsidy accounted for roughly 2.5 per cent of India’s GDP (gross domestic product). Budget 2012-13 sought to restrict expenditure on subsidies to 2 per cent of GDP, but the finance ministry expects it to rise to around 2.4 per cent in this fiscal on account of high fuel bills.

However, the survey states that apart from cutting down the subsidy burden, more tax income is also essential to contain the fiscal gap.

“It is better to achieve fiscal consolidation partly through a higher tax-GDP ratio than merely through reduction in the expenditure-to-GDP ratio, in view of large unmet development needs,” said the survey.

The tax-GDP ratio touched a peak of 11.9 per cent in 2007-08 but declined to 9.6 per cent in 2009-10. It was 9.9 per cent in 2011-12.

 
 
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