Releasing the Review of the Economy: 2011-12, Chairman of Prime Minister's Economic Advisory Council (PMEAC) C Rangarajan also pitched for deregulation of urea prices.
Expressing concern over high fiscal deficit which is expected to overshoot the target of 4.6 percent of GDP this fiscal, he said the government "must try" to contain and improve efficacy of subsidies.
"It will be necessary during 2012-13 to make some adjustments on the diesel prices in a phased manner. We have not done this for quite some time and international crude prices have gone up ... It is not possible for us to subsidise this sector beyond a level," Rangarajan said.
Diesel price was last hiked in June 2011. However, the government had cut excise and customs duties to cushion the impact of the price rise, thus sacrificing an annual revenue of Rs 38,000 crore.
Rangarajan further said that "partial reforms in the fertiliser subsidy regime of introducing nutrient-based subsidisation will not be effective unless the price of urea is decontrolled or at least raised substantially".
The government expects that its subsidy bill would increase by Rs 1 lakh crore to Rs 2.34 lakh crore, mainly on account of higher outlay towards fertiliser, food and oil.
On improving the tax to GDP ratio, Rangarajan said the excise duty and service tax should be increased to pre-crisis level, a move which will bring in additional Rs 35,000 crore.
Before the economic crisis, service tax and excise duty rates were at 12 percent, but as a stimulus the government had brought them down to 10 percent in 2008-09.
"If you go back to 12 percent... as a back of envelope calculation, you can get a additional revenue of Rs 35,000 crore," Rangarajan added.
Rangarajan said to improve tax to GDP ratio to the pre-crisis level of 12 percent, the government needs to improve on the tax administration system to plug evasion and also rationalise duty structures.
The ratio was 10 percent in 2010-11 and is likely to remain at the same level in the current fiscal.
Rangarajan said the government should aim at increasing tax revenues, bring back disinvestment on the table and contain subsidies to check its finances.
"We should lay out a roadmap for fiscal consolidation for bringing down the fiscal deficit," he said adding the path advocated by the 13th Finance Commission is no longer valid as the fiscal deficit in next fiscal too could overshoot the 4.1 percent target.
On food subsidy, Rangarajan said its large volume continues to be plagued by poor targeting.
"Of course, the volume of subsidies on both oil and fertilisers has continued to proliferate due to continued elevation in the price of crude oil and the depreciation of the rupee. Thus, both fuel and fertiliser subsidies, especially fuel, are likely to exceed the Budget estimate by wide margins," he added.
Similarly, spending on wages and salaries has continued to rise in the wake of continued inflationary pressures.
The impact of slowing down of economy in the current fiscal has resulted in considerable slippage in direct tax collection. However, indirect tax collection is likely to meet budget estimates in the current fiscal.
The government had envisaged to mop up Rs 9.32 lakh crore from taxes this fiscal, but is likely to miss the target. The government finances are also under stress as the disinvestment receipts have totalled just Rs 1,145 crore, against target of Rs 40,000 crore.
Source: Zeebiz.com
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