Spending spree: Packages for MSMEs, farmers raise fiscal slippage risks, says Moody’s

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Updated: January 26, 2019 6:58:19 AM

While the government could accelerate stake sales in public-sector banks and seek special one-off dividend payments or deferments of subsidy payments to government-related entities to bridge budget shortfalls, the positive impact on the government finances would be short-lived, the agency said.

The decision to double the exemption threshold under the goods and services tax (GST) to `40 lakh annual turnover with effect from April 1 along with earlier cuts in tax rates would erode the revenue base in the near term, it said.

The measures taken by the government to support MSMEs and those being planned to help farmers ahead of polls will potentially cause fiscal deficit to slip to 3.4% of GDP this fiscal, against the targetted 3.3%, Moody’s Investors Service said on Friday. It cautioned that meeting short-term fiscal objectives through one-off sources of revenue, such as a special dividend from the Reserve Bank of India (RBI) and cuts in capital expenditure, would only denote weak fiscal policy effectiveness.

“Over the past month, the Indian government has announced a range of policies to support the incomes of small enterprises and low-income households. It is also considering additional steps to support farmers facing financial distress. In the absence of new revenue-boosting measures, the policies will collectively make it harder for the government to achieve its fiscal consolidation objectives,” Moody’s said.
The fiscal deficit already hit 114.8% of the budget estimates in April-November.

“Without other expenditure rationalisation, higher subsidy spending on the agricultural sector will increase future fiscal deficits. Some of the measures under consideration, such as direct cash transfers to the agriculture sector, will reduce intermediaries and limit leakage in the system. However, the final design and implementation of the schemes will ultimately determine the size of any efficiency gains,” Moody’s said.

While the government could accelerate stake sales in public-sector banks and seek special one-off dividend payments or deferments of subsidy payments to government-related entities to bridge budget shortfalls, the positive impact on the government finances would be short-lived, the agency said.

“Achieving deficit reduction through such unpredictable revenue sources denotes weaker fiscal policy effectiveness than if consolidation were achieved through more durable and predictable revenue sources such as tax revenue,” Moody’s said.

The decision to double the exemption threshold under the goods and services tax (GST) to `40 lakh annual turnover with effect from April 1 along with earlier cuts in tax rates would erode the revenue base in the near term, it said.
Moody’s had in November 2017 raised India’s sovereign rating from the lowest investment grade of ‘Baa3’ to ‘Baa2’ and changed the outlook to stable from positive citing improved growth prospects driven by reforms.

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