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Lower taxes likely to revive investment, but govt may find managing fiscal deficit tougher

When asked about the impact of the measures on the fiscal deficit, Finance Minister Nirmala Sitharaman said the government is conscious of the impact and expects the economic buoyancy resulting from these changes to generate significant resources.

Written by Sunny Verma , Aanchal Magazine | New Delhi | Updated: September 21, 2019 3:50:33 am
'I’ve been working': Nirmala Sitharaman tweets after criticism One way the government could manage to keep fiscal deficit at target level of 3.3 per cent of GDP by March 2020 is through aggressive asset sales. (PTI)

The Rs 1.45 lakh crore worth of yearly stimulus in the form of tax cuts could make the government’s task of managing fiscal deficit reduction target more challenging. While the Centre is hoping that the investment and economic revival resulting from competitive tax rates could yield higher revenues in the medium term, the government will face fiscal pressures in the near term despite a record dividend transfer from the Reserve Bank of India (RBI), analysts said.

When asked about the impact of the measures on the fiscal deficit, Finance Minister Nirmala Sitharaman said the government is conscious of the impact and expects the economic buoyancy resulting from these changes to generate significant resources. “The idea is economic buoyancy will itself generate enough (resources) for better income/revenue generation. The moment tax rates are brought down, you are also expected to widen the basket. That is another reason why we will definitely be having a positive impact on revenue collections … The new tax rates are going to draw new investments and make companies, who want to expand existing businesses, invest more,” she told reporters in Goa on Friday.

One way the government could manage to keep fiscal deficit at target level of 3.3 per cent of GDP by March 2020 is through aggressive asset sales. The government is already planning to sell stakes in some companies to below 51 per cent. Sale of significant stake in companies in energy sector such as BPCL, ONGC, Coal India could generate resources enough to cover this year’s shortfall in tax revenues, a senior official.

“We are conscious of the impact of the tax rate cuts on the fiscal deficit. We are quite seized of all these details. We will be taking all of that on board to reconcile as to how the situation is now and how we want to take it forward. We are not oblivious of these developments,” the FM said.

Bond markets reflected concerns that lower tax collections could push the deficit higher, forcing the Centre to borrow from the markets. Yield on the benchmark 10-year government bond ended higher by as much as 15 basis points to 6.79 per cent on Friday. The fact that this will put a strain on the fiscal deficit will not be taken kindly by foreign portfolio investors (FPI), said the head of a financial services firm. Friday’s investment data shows that while domestic institutional investors pumped in net of over Rs 3,000 crore in securities, FPIs’ net buying was only Rs 35 crore.

HDFC Bank chief economist Abheek Barua said the tax cut could attract greater foreign investments, revive capex cycle and boost GDP growth by about 20-50 basis points. However, in the absence of any significant expenditure cuts, the fiscal deficit is estimated to rise to 4.1 per cent of GDP in 2019-20, he added.

Lower corporate tax collections, revenue shortfall on account of lower GST collections and additional outlay for recent measures announced for the real estate and export sectors could also put pressure on fiscal deficit.

“There is a possibility that with higher disinvestments, revenue expenditure roll-overs and some expenditure cuts the government could buy some fiscal space. For instance, the government has on average rolled over 30 per cent of its food subsidy bill to FCI over the last three fiscals. A similar roll-over this year could add close to 0.3 per cent of GDP in fiscal space. So, in the event of an expenditure compression or higher disinvestment proceeds, the fiscal deficit could come in between 3.7 per cent-3.9 per cent of GDP for 2019-20,” Barua said.

Another cushion for the Centre is the additional Rs 58,000 crore it has received as compared to Rs 90,000 crore accounted for as surplus transfer from the RBI in the Budget 2019-20, for spending in the current fiscal. Since the RBI had already paid Rs 28,000 crore as interim dividend to the government last year, the Centre is left with Rs 1.48 lakh crore out of Rs 1.76 lakh crore for FY20.

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