Amid widening fiscal deficit, Prime Minister's economic advisory panel today suggested aligning diesel prices to global market in a phased manner and also raising excise and service taxes to pre-crisis level of 12%.
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% 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%, but as a stimulus the government had brought them down to 10% in 2008-09.
"If you go back to 12%... As a back of envelope calculation, you can get a additional revenue of Rs 35,000 crore," Rangarajan added.
