Moody’s warns Modi government on petrol price cut; expects fiscal deficit to slip to 3.4%

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Updated: October 9, 2018 4:54:54 PM

Moody's expects the government to miss the fiscal deficit target of 3.3% of the GDP by 10 basis points in FY19 after the recent excise duty cut on fuel prices.

On October 4, the central government announced Rs 1.5 per litre tax cut on both petrol and dieselOn October 4, the central government announced Rs 1.5 per litre tax cut on both petrol and diesel. (Image: Reuters)

Rating agency Moody’s today warned the Narendra Modi government following the decision to cut the tax on fuel, saying that it may have “downside risks” on the fiscal deficit target. Moody’s expects the government to miss the fiscal deficit target of 3.3% of the GDP by 10 basis points in FY19.

“These measures create material downside risks to the central government’s fiscal deficit target of 3.3% of GDP for fiscal 2018,” Moody’s said, adding that it expected “the central government deficit target to slip modestly to 3.4% of GDP, Reuters reported.

On October 4, the central government announced Rs 1.5 per litre tax cut on both petrol and diesel, while also asking oil companies to absorb the loss of Re 1 per litre. Following the combined tax relief of Rs 2.5 a litre from central government and oil companies, some states also announced additional VAT cut on fuel prices.

Describing the move as “credit negative”, Moody’s said that the tax cut will reduce the government’s revenue by Rs 1.05 lakh crore. Moody’s warning is in contrast with government’s claim, which exuded confidence in achieving the fiscal deficit target.

Finance Minister Arun Jaitley, while announcing the tax relief, had said that it will impact the fiscal deficit target by a mere 0.05%, which can be offset by more-than-expected direct tax collections. The government estimated the fuel tax relief to cost Rs 70,000 crore.

In November, Moody’s had upgraded India’s credit rating to Baa2 from Baa3 following the implementation of the Goods and Services Tax (GST) and the country’s huge jump on World Bank Ease of Doing Business index. Other two of the big 3 rating agencies — Fitch and Standard & Poor’s — continued with the lowest investment grade rating of BBB- with ‘stable’ outlook on India.

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