Govt to cut spending by Rs 2 tn this fiscal amid biggest tax shortfall in recent years; likely to hit growth: Report

New Delhi: The government is likely to cut spending for the current fiscal year by as much as Rs 2 trillion as it faces one of the biggest tax shortfalls in recent years, three government sources said.

Asia’s third-largest economy, which is growing at its slowest pace in over six years because of lack of private investment, could be hurt further if the government cuts spending.

But with a revenue shortfall of about Rs 2.5 trillion, the government has little choice to keep its deficit within ‘acceptable limits’, the first official, who did not want to be named, told Reuters.

The government has spent about 65 percent of the total expenditure target of Rs 27.86 trillion till November but reduced the pace of spending in October and November, according to government data. A Rs 2 trillion reduction would be about a 7 percent cut in total spending planned for the year.

In October and November, government spending increased by Rs 1.6 trillion, nearly half the 3.1 trillion it spent in September. The fiscal year starts from 1 April and ends on 31 March.

Lack of demand and weak corporate earnings growth in the economy led to lagging tax collections this year. Analysts said growth will be hurt.

“When the private investment has slowed so much, this will definitely drag down growth further,” said Rupa Rege Nitusure, chief economist at L&T Financial.

the country’s economic growth slowed for six consecutive quarters to 4.5 percent in July-September, despite a 135-basis-point cut in interest rates by the central bank since February 2019.

Now, even the Reserve Bank of India seems to have become more worried about inflation rising. It kept its key lending rate on hold on December 5, even though it slashed its growth forecast for the current fiscal to 5 percent, which would be the lowest in a decade.

Even a surprise corporate tax rate cut announced by Finance Minister Nirmala Sitharaman earlier this year failed to spur private investment in the economy.