The direct cash transfer programme for farmers and tax relief steps for the middle-class will give a fiscal stimulus of about 0.45 percent of GDP, and support growth through increased consumption, though at a fiscal cost, Moody's Investors Service said Tuesday. Observing that fiscal slippage from the budgeted targets for the past two consecutive years is "credit negative" for India, Moody's said the government will face challenges of meeting its target again next year and this does not bode well for medium-term fiscal consolidation.
It said that while the middle-class tax relief will weigh somewhat on direct tax revenues, GST collections will continue to pose risks to indirect tax collections if they fall short of budgeted expectations. "Together, the direct cash transfer programme for farmers and the middle-class tax relief measures will contribute a fiscal stimulus of about 0.45 percent of GDP, which will support growth through consumption over the near term, albeit at a fiscal cost," Moody's said.
The government has budgeted for total expenditure growth of 13.3 percent annually in 2019-20 from 14.7 percent in the current fiscal, resulting in an increase in total spending to about 13.25 percent of GDP from 13 percent of GDP this fiscal. The government has budgeted for gross tax revenue growth of 12.4 percent annually in 2019-20 from 17.2 percent this fiscal.
"Based on the government's nominal GDP growth assumption of 11.5 percent, this implies a tax buoyancy of about 1.08, which we consider to be achievable. However, similar to last year, there are risks to the downside in 2019-20," Moody's said. The government budgeted an increase in GST revenues to 4 percent of GDP in 2018-19 from 2.6 percent in 2017-18. However, the revised estimate is 3.4 percent of GDP in 2018-19 and 3.6 percent of GDP in 2019-20, it said.
"Recent adjustments to the GST framework will make collections more challenging ... The changes will further shrink the tax base, constraining potential future increases in tax revenue, because SMEs represent the vast majority of businesses in India," Moody's said. In January 2019, the GST Council doubled the income tax exemption limit for companies to Rs 40 lakh in annual revenue, and adjusted turnover limits under the concessionary GST composition scheme. These changes will take effect in April 2019 and follow several cuts to GST rates since its implementation in July 2017.
In the interim budget for 2019-20, the government proposed to increase spending to provide income support for small farmers and introduce a middle-class tax cut in the run-up to the general election between April and May. In light of these budget measures, the government announced slippage from its original fiscal deficit targets to 3.4 per cent of GDP both for fiscal years ending in March 2019 and March 2020.
"Ongoing fiscal slippage from spending and tax cut proposals ahead of election is credit negative for the sovereign," Moody's said. It said the ongoing fiscal slippage from the budgeted targets over the past two years, and our expectation that the government will face challenges meeting its target again in fiscal 2019, does not bode well for medium-term fiscal consolidation.
Moody's, however, said that lack of a formal capital support plan for public sector banks is credit negative. The budget does not include any provisions for capital support for public sector banks (PSBs). Meanwhile, the budget also does not address last year's announced merger of three public sector non-life insurers, which creates ambiguity around their merger plan, the US-based rating agency said.
On cross-sector analysis of Budget, Moody's said the Budget proposals are positive for the real estate sector but negative for state-owned oil and gas companies. "The budget includes both direct and indirect benefits for the real estate sector and will likely help boost property demand," Moody's said.
For state-owned oil and gas companies, a planned increase in expected proceeds from dividends and disinvestments, in addition to an under provision of fuel subsidies, is negative, it added. Further, a modest increase in public spending on infrastructure is credit positive. The planned increase in public infrastructure spending is credit positive for companies in this sector.
Capital outlays for key segments within infrastructure, like highways and railways, will increase modestly in fiscal 2019 from fiscal 2018. Besides, middle-class tax relief and measures to boost farmers' incomes are credit positive for Indian asset-backed securities (ABS) and residential mortgage-backed securities (RMBS) because they will help borrowers remain current on their payments and reduce default risk.
(With inputs from agencies.)