New Delhi: Rating agency Fitch on Thursday said the Indian government’s decision to sharply cut corporate tax rates may increase fiscal deficit by 40 basis points (bps) over the budget estimate of 3.3% of gross domestic product (GDP) for 2019-20. It added that the fiscal impact will be felt much earlier than the growth impact of the decision.
“Expenditure postponements are more difficult for the government given weak growth, and we expect the central government to miss its 3.3% of GDP deficit target for FY19-20 by about 0.4pp. We now expect a general government deficit of 7.5% of GDP, well above the ‘BBB’ category median of 1.9%," it added.
Finance minister Nirmala Sitharaman on Sunday said the ministry is encouraging departments and infrastructure public sector units to speed up expenditure.
The rating agency said while the government has estimated the cuts to cost around 0.7% of GDP in lower revenue, the record annual transfer of $24.8 billion from the Reserve Bank of India, announced in August, should largely fill this gap, although revenues this year are already behind target.
However, Fitch said the government action has both its positive and negative impacts on its sovereign rating assessment. “Higher sustained investment and growth rates, without the creation of macroeconomic imbalances, could be positive for India’s credit profile, while a rise in the government debt burden could be negative," it added.