Why The Fiscal Deficit May Remain Limited To 3.5-3.6 Per Cent Post-Corp Tax Cuts

The risks of a large fiscal slippage in the current year are expected to be addressed through larger non-tax revenues and the savings on interest expenses, ratings and research firm Acuite said, adding therefore, fiscal deficit in the current fiscal may remain limited to 3.5-3.6 per cent moderately higher by 0.2-0.3 per cent over the budgeted levels.

Additional non-tax revenues, particularly disinvestment profits, can be a key driver. Acuite Ratings believes that there is still a significant scope to limit India's fiscal deficit to 3.5-3.6 per cent, if the government gives high priority to disinvestment and there is a sustainable revival in consumption and market sentiment, expected to be brought in by the sharp cut in corporate taxes up to 10 per cent, over the next two quarters.

The government is already working on the disinvestment of a few large public sector companies and if the equity markets respond well to the efforts made to revive economic growth, the government may succeed in exceeding the disinvestment target of Rs 1.05 lakh crore, said the report.

Acuite's analysis further suggests that over and above the use of the escape clause under the FRBM Act, which permits an additional 0.2 per cent slippage, any sharp increase in the fiscal deficit triggered by the liberal corporate tax cuts can be offset by the special dividend from RBI, additional non-tax revenues brought about by the cuts and a likely reduction in interest obligations due to larger rate reductions by RBI than expected in the budgetary figures.

Surely, the cut in base corporate taxes from 30 per cent to 22 per cent for existing companies and for new manufacturing companies at 15 per cent is expected to spur a revival in the economy, which has recorded one of the slowest rates of growth over 20 years in Q1FY20, it added.

Acuite Ratings said the corporate tax rationalization measures along with the ongoing accommodative monetary policy of RBI should help to boost corporate savings and translate into higher demand as also a pickup in private sector investments over the medium term. However, such economic advantages notwithstanding, the booster package comes at a cost to the fiscal commitments.

While the government has estimated that it will have to forego Rs 1.45 lakh crore of tax revenues, the actual shortfall may be even higher in the context of weaker consumption and lower indirect tax revenues than the budgeted figures. The market, therefore, anticipates a significant slippage in the fiscal deficit from the proposed 3.3 per cent to a figure closer to 4.0 per cent, the report pointed.

Acuite however, believes that the fiscal position can be significantly better than what the fiscal mathematics suggests if there is a focus on augmenting non-tax revenues. Already, there has been a windfall gain of Rs 59,000 crore over and above the budgeted Rs 90,000 crore dividend income from RBI in the current fiscal.

The government has an aggressive disinvestment target of Rs 1.05 lakh crore in the current year; this can be exceeded if the government targets the disinvestment of large and profitable PSUs such as the oil companies over and above the planned ones such as Air India.

Clearly, such a disinvestment programme has to scout for interested global players who may be keen to make an entry into India, thereby translating into big-ticket foreign investments, the agency said. Further, non-tax revenues such as dividend and dividend taxes should witness an uptick in the current year.

With higher post-tax profits, PSUs are expected to declare higher dividends and the government should also gain from higher dividend taxes from improved private sector profits and dividends. Acuite expects such additional inflows in the order of Rs 20,000-30,000 crore.

Our calculations further indicate that the government will be able to save on interest expenses to the extent of another Rs 59,000 crore given the lower bond yields and an expectation that yields will go further lower as inflation continues to sustain at moderate levels, Acuite said.

All the above figures add up to around Rs 1.5 lakh crore, which potentially can address the tax shortfall to almost the entire extent or at least up to 80 per cent of that amount. What is also interesting is the fact that the government of India has the option of using FRBM Act's escape clause. The clause can be triggered in special circumstances, it said.

(This story has been published from a wire agency feed without modifications to the text. Only the headline has been changed.)