Economic prudence will dictate that you have to invest your way out of a recession. In the present complexities of the economy and governance, the need is not only to invest but also innovate out of a recession, said Sajan Poovayya, chairman, Karnataka State Council, Federation of Indian Chambers of Commerce and Industry (FICCI).
He said while the government could have done more in terms of spending on infrastructure and on the indirect tax front, the finance minister’s move in providing tax cuts across a wide spectrum of goods and services is indeed a welcome initiative, he said. “The 2 per cent cut in service tax and excise duties on most commodities will not only help ease the household budget but also provide impetus to the economy by boosting demand. The third stimulus package to the tune of approximately Rs 30,000 crore although welcome, could have been better targeted,” he said.
While the duty cuts apply largely to non-essential commodities, cars, colour TVs, refrigerators and other consumer durables will become cheaper, and the stimulus package may not lead to price reduction in essential commodities.
“The government should have structured its investments to stimulate the economy on a stage-by-stage basis. Primary investments to prime the economy should occur in infrastructure development and related activities which lead to employment generation. Secondary investments should be targeted at reducing prices of essential commodities aimed basically at making the food basket more affordable. Tertiary investments could certainly be targeted at reducing the prices of consumer durables, among others, to boost demand in the economy. Unfortunately, the government has focused less on infrastructure and more on consumer durables. The election season and need for populist measures rather than macroeconomic prudence, seem to have dictated the government’s agenda with regard to the third stimulus package,” Poovayya said.
Industry as a whole has felt that the extension of customs duty exemption on naphtha will enormously benefit naphtha-fired thermal power plants and contribute towards affordable power. There is optimism that the service tax reduction will help improve sagging demand in key sectors like tourism, hospitality, civil aviation and telecom and spur consumer spending.
“These tax cuts can also lead to the availability of cheaper cement and steel, which in turn will facilitate growth in the construction industry and reduce cost of housing. The extension of income tax waiver for companies with subsidiaries or units within special economic zones is welcome as it rationalises the tax free regime for IT companies which are major employers,” Poovayya said.
He added that a stimulus package should be accompanied by interest rate cuts on the repo rate and cash reserve ratio fronts if it is to have the right impact.
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Bangalore Chamber of Industry and Commerce president N N Upadhyay felt that cuts in excise duty and service tax and extension of benefit beyond March 2009 ought to have a positive impact on stimulating demand in core industries and raising consumer confidence.
“The excise duty reduction to 8 per cent from 10 per cent earlier covers 90 per cent of excise duty collections, and should help the beleaguered cement, steel, FMCG, commercial vehicles and the consumer durables segments that form a significant portion of industrial output in the country. The reduction should also help revive the construction and housing segments, particularly, consumable durables and related sectors,” Upadhyay noted.
He said that the “measured risk” taken by the central government to put revenues worth Rs 30,000 crore on the line would help state governments to borrow more to invest in infrastructure.