Fiscal deficit likely to rise by 30-40 basis points

Shishir Sinha Panaji (Goa) | Updated on September 21, 2019 Published on September 20, 2019

Tax sops will burn a ₹1.45 lakh-crore hole in Central government’s tax kitty

Though the reduction in tax rates for corporates may widen the fiscal gap by at least 30-40 basis points, the Centre may have some cushion that could soften the revenue shock.

The Budget had set a deficit target of 3.3 per cent or ₹7.03 lakh crore. With Friday’s announcement, the government estimates the revenue forgone at ₹1.45 lakh crore.

If the entire amount is added, then the new deficit number would be ₹8.48 lakh crore, and in terms of percentage of GDP, it could go up by nearly 70 basis points or to 4 per cent. Also, as the nominal growth is likely to come down in comparison to the Budget estimate, this could further affect the fiscal deficit.

However, thanks to the ₹1.76 crore transfer by the Reserve Bank of India, the net gain to the Centre during the current fiscal would be around ₹60,000 crore.

Since, this was not mentioned in the Budget, this could help in bridging the fiscal gap by 10 to 20 basis points. Also, experts feel that with stock markets on the rise, the government could get better valuation on disinvestment. Considering the track record on sell-off, there is a possibility of higher revenue on the non-tax revenue front, which will lessen the pressure on the fiscal front.

Sunil Kumar Sinha, Principal Economist with India Ratings, said that the new measures will boost the sentiment. “This will encourage the corporates to expand their businesses, which in turn will result in better revenue realisation,” he said. However, there is a possibility of some revenue expenditure such as subsidy payout to oil or fertilisers companies.

Aditi Nayar, Principal Economist, ICRA, expects Friday’s announcement to provide a big boost to business sentiment in the immediate term, with a modest knock on consumption demand, particularly for big-ticket items.

However, the impact on fresh investment activity may be visible with a lag.

While a fiscal slippage now appears inevitable given that the government’s tax collections will fall substantially short of its Budget estimates, expenditure cuts may be required to prevent the fiscal deficit as well as G-Sec yields from rising too sharply in FY2020.

Additionally, the lower Central tax collections will impact State governments’ fiscal position as well, through likely cuts in Central tax devolution. With borrowing constraints, State governments may also defer expenditure.

Rate cut imminent

“Today’s announcement would complement the expected further repo rate cut in the October 2019 policy review.

“We continue to expect a 25 bps rate cut in the upcoming MPC review,” Nayar said, while adding that in light of the likely back-ended pick up in investment activity and expenditure restraint that would be required, particularly at the State government level, the agency is not yet revising its FY2020 GDP forecast upward from 6.2 per cent.

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Published on September 20, 2019
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