Senseless sops

In what may be its last move before the election code of conduct sets in, the government on Tuesday cut excise duty and service tax rates by 2% each. Given the slowdown, lower tax collections — both direct and indirect — have already hit government revenues. The tax incentives mean the fiscal deficit would widen further. 

A host of other measures being implemented by the government, such as debt relief for farmers and pay hike for government employees, have already put the fiscal position under stress. Experts say revenues would be hit to the extent of Rs 30,000 crore, pushing up the fiscal deficit to 6.5% of the gross domestic product from current 6% now. 

Meanwhile, rating agency Standard and Poor's (S&P) downgraded its outlook on India's long-term sovereign credit rating to negative from stable. S&P has pegged deficit for FY2009 at 11.4%. 

At a local level, the duty and tax cuts are intended to boost consumption in the country by urging companies to pass on the duty cut benefits to the end consumer. Prima facie, industries such as auto, cement and real estate are likely to benefit. However, auto analysts say it would not impact all categories of cars. Cement prices are likely to come down by Rs 4-5 per 50 kg bag from next month. 

Politicians expect that a fall in cement prices will help real estate developers by allowing them to cut prices further and thus boost demand. But analysts don't see that happening soon, unless builders cut prices substantially. 

The broader markets recovered post the duty cut announcement. The BSE Sensex touched a low of 8619.22 before ending at 8822.06.

Positive as the sops appear, things may only get worse from here.

Pallavi Pengonda/ DNA-Daily News & Analysis Source: 3D Syndication

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