New Delhi: India’s combined fiscal gap, including deficits of states, is seen widening to the highest in about eight years as the government boosts measures to stimulate a slowing economy.
The general government deficit is seen at 7.5% of gross domestic product in the year to March, according to Fitch Ratings. The combined deficit was around 8% in the financial year ended March 2012, according to government data.
Fitch’s reading is well above the ‘BBB’ category median of 1.9%, with ‘BBB’ — the rating assigned to India — denoting a low default risk.
Prime Minister Narendra Modi government’s decision to cut taxes on companies is a departure from its conservative budget in July, when it targeted narrowing the federal government’s fiscal gap to 3.3% of GDP from 3.4%. The flip flop triggered the biggest rout in local bonds in eight months on Friday amid the specter of missing deficit targets.
The federal government will miss its budget gap goal by about 0.4 percentage points, Fitch said in the report. India’s $20 billion worth of corporate tax cuts support efforts to stimulate investment and growth in the medium term, but will cause the fiscal deficit to widen in the near term, it said.
Fitch’s estimate of 3.7% federal deficit means the gap for states would be much higher than the 2.4% estimated by the Reserve Bank of India.
The government’s stimulus was part of a series of steps unveiled to support the economy, after growth cooled to a six-year low of 5% in the quarter ended June. The tax cut also means a reduction in states’ share of taxes.
“In contrast to the growth impact of tax cuts, the fiscal impact will be felt in this fiscal year,” the ratings company said. “The government says the cuts will cost around 0.7% of GDP in lower revenue – about two-thirds to the central government and one-third for state governments.” – Bloomberg