Corporate tax cut: Analysts warn of massive fiscal slippages; peg deficit at 4.1%

Mumbai: The spectre of fiscal slippages awaits the country after the massive tax giveaways, which though will boost the sputtering growth engine and is positive from a long-term perspective, warned analysts. The government has pegged the fiscal impact of the 10 percentage points cut in corporate tax worth Rs 1.45 lakh crore in revenue foregone, is 0.7 percent of GDP. While announcing the booster measures, finance minister Nirmala Sitharaman, however, side-stepped all questions on fiscal deficit. The budget has pegged fiscal deficit at 3.3 percent of GDP for FY20 and the government has already crossed 77 percent of that in the first four months itself. [caption id=“attachment_7363111” align=“alignleft” width=“380”] File image of finance minister Nirmala Sitharaman. PTI[/caption] The government had to initiate the measures to spur growth, which has slipped to a six-year low of 5 percent, by making investment-friendly policies. The measures come a day after the RBI had said the government does not have any fiscal space for initiating growth-friendly measures. “Considering the present slowdown chances are high that the government might miss the fiscal deficit target for FY20,” Deepthi Mathew, an economist at the domestic brokerage Geojit Financial Services, said. She, however, added the move will be helpful from a long-term perspective for the fiscal. Largest private sector lender HDFC Bank’s house economists said the fiscal deficit number will bloat up to 4.1 percent as against the targeted 3.3 percent and also result in Rs 1.50 lakh crore in excess government borrowing beyond the budgeted Rs 7.04 lakh crore.

Reacting to the announcement, the 10-year benchmark bond rose 0.20 percent to 6.8 per cent Friday, while the rupee gained 0.5 percent and the stocks market indices rallied to log in the biggest single-day gain in a decade. It can be noted that the government might miss the tax revenue target by a wide margin is clear from the first half direct tax mop-up, which inched up just 4.7 percent against a steep 17.5 percent budgeted for the year. GST has also been missing as only in April it could cross the ideal Rs 1 lakh crore mark so far this fiscal year. Fiscal deficit number is a closely watched one by rating agencies tracking the sovereign’s financial health due to its impact on inflation and overall macroeconomic stability. In the past, the country’s ratings and outlooks have been influenced by this number. Without commenting on the fiscal deficit or impact in government finances, global ratings agency Moody’s welcomed the moves as “credit positive”. The government slashed corporate tax by almost 10 percentage points with the Rs 1.45-lakh crore tax giveaways in the measures announced by Sitharaman in Goa. It has chosen to implement the same due through the ordinance route.

“These measures would increase the chances of higher fiscal deficit and government may have to resort to spending cuts or embark on higher disinvestments,” Arun Thukral, the head of the brokerage Axis Securities, said. Domestic rating agency Icra’s chief economist Aditi Nayar said fiscal slippage “appears inevitable” now and added that expenditure cuts will be required to prevent the fiscal deficit as well as G-sec yields from rising too sharply. “Additionally, lower Central tax collections will impact the states’ fiscal situation as well through likely cuts in central tax devolution, and borrowing constraints may necessitate state government expenditure restraint or deferral,” she said. An analysis of BSE500 companies by the brokerage Emkay reveals companies should see a 12 percent drop in tax bill on their FY19 numbers, and pegged the impact to the fiscal deficit because of the moves at 0.40 percent. “Slashing the corporate taxes, although hits the fiscal deficit space, could attract FDI inflows (where the focus is shifting from China) and kick start the private investment cycle,” it said, adding the impact may not be very inflationary.