'Government likely to raise tax rates in budget'

New Delhi: The government is likely to raise taxes on a number of manufactured items and expand the tax net in its budget to rein in its deficit and give space for the Reserve Bank of India (RBI) to cut interest rates to support growth, a top government economic adviser said on Friday.

The RBI has called on the government to cut its fiscal deficit to help fight inflation, while signalling its bias is towards beginning to cut interest rates.

India's fiscal deficit is expected to miss its target of 4.6 per cent of GDP in the fiscal year ending this month by at least one percentage point.

"One of the possibilities is full rollback of the stimulus -- that is almost 1 per cent of the GDP," Pronab Sen, principal adviser to the Planning Commission, told on Friday.

India implemented a stimulus package of about 1.86 trillion rupees following the 2008 global financial crisis, mainly through tax cuts, which have only been partly rolled back.

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

C Rangarajan, chairman of the Prime Minister's Economic Advisory Council, has said the government should lift its tax to GDP ratio to 12 per cent, where it was in the fiscal year that ended in March 2008, from its current level near 10.4 per cent.

The finance minister may also raise import duties on power equipment in the budget, Sen said.

A proposal to increase factory gate duties on a number of items to 12 per cent from 10 per cent is also under consideration.

"Unless you have a fiscal correction happening it will not create the space for the RBI to relax on monetary policy," he said.

Industrial groups are lobbying for a further cut in tax rates to support economic recovery.

The RBI ended a 20-month interest rate tightening cycle in October. Economists expect it to cut its main policy rate by 100 basis points in 2012 from the current 8.5 per cent.

India's economic growth slowed to 6.1 per cent in the three months to December, the weakest annual pace in almost three years, as high interest rates and rising raw material costs constrained investment and manufacturing.

Even if the RBI starts cutting interest rates in March or April, the investment cycle will not pick up before the July-September quarter, Sen said.

"It could be around 7 per cent till the second quarter of next fiscal," he said. "We have to live with cycles."

Finance Minister Pranab Mukherjee, who will present the annual budget on March 16, confronts a worsening deficit as a result of rising subsidies for fuel and food and weak economic growth. Populist pressures within the ruling Congress party and its allies make it tough to cut spending.

Raising fuel prices is especially unpopular.

"It has to be a multi-party decision. You cannot have government just doing like that," said Sen. He does not expect a fuel price hike in the budget but said Mukherjee may signal intent to discuss the issue.

India imports nearly 80 per cent of its crude oil, and the government's oil subsidy bill is set to top $12 billion in the current fiscal year as it has found it politically difficult to pass on rising prices to consumers.