BL Research Bureau

The Finance Minister Nirmala Sitharaman’s corporate tax rate cut has cheered India Inc and equity market. But bond markets have reacted negatively, as the yield on 10-year G-Sec climbed 20 basis points post the FM’s announcement.

What is bothering the bond markets is the ₹1.45 lakh crore revenue foregone figure due to reduction in corporate tax rate that can upset the 3.3 per cent fiscal deficit target number. After the Bimal Jalan Committee-recommended surplus transfer by the RBI, that offered some respite to the Centre, the latest announcement has brought the focus back on the fiscal deficit.

Read | Government slashes taxes for corporate, new manufacturing firms

How will the Centre meets its fiscal target?

The math

Let us start by looking at the RBI surplus number. Excluding the ₹28,000 crore interim dividend already paid by the RBI to the Centre last fiscal, the net transfer in the current financial year amounts to ₹1,48,051 crore.

This is essentially about ₹60,000-65,000 crore above what was estimated in the Budget, by way of dividends from the RBI. This tidy amount would have helped the Centre’s fiscal deficit, by making up for the shortfall in the Centre’s tax collections to a great extent.

Read | FM slashes corporate tax rate: Here’s what it means for India Inc

Based on CGA provisional figures for FY19 (in which income tax grew by a modest 7 per cent), the estimated growth in income tax collections for FY20 works out to 23 per cent. For April-July, CGA data suggests that the growth from net income tax was just about 6 per cent. There is a lot of uncertainty over GST collections too. Hence the RBI’s surplus could boost overall revenue for the Centre and help meet its fiscal deficit target, at best. There was little scope for stimulus in any case. Fiscal deficit is already 77 per cent of the full year target.

Thus the latest stimulus offered by the Centre by way of corporate tax rate cut leading to ₹145,000 crore of revenue foregone would impact the fisc by about 60 basis points.

Hence the fiscal deficit target could well touch the 4 per cent mark.

Read | Corporate tax cut: Diwali bonanza to corporates

Nominal GDP plummets

The joker in the pack is still the underlying growth in the economy. While the real GDP growth has fallen from 8 per cent last year to 5 per cent this fiscal in the April-June quarter, the sharp fall in nominal GDP growth from 12.6 per cent to 8 per cent during this period, is worrisome.

The Centre’s 3.3 per cent fiscal deficit target assumes a 11 per cent growth in nominal GDP growth for FY20 (from CSO’s FY19 estimates).

Given the current sharp slowdown and the underlying trend in inflation, such growth appears a tall task. If growth falters further then the fiscal deficit target can move beyond 4 per cent levels!