Corporate tax cut likely to support growth, but will widen fiscal deficit in near term: Fitch

27 Sep 2019 Evaluate

Fitch Ratings has said that the steep cut in tax paid by companies may support efforts to stimulate investment and Gross Domestic Product (GDP) growth in the medium term, but will cause the fiscal deficit to widen in the near term. It added that as such, slippage from previous government fiscal targets this year (FY19-20) is now very likely. It said a positive impact on FDI would be more likely if the tax cuts were accompanied by further measures to improve India's business environment. In particular, corporate tax rates are likely to be only one in a list of factors determining investment decisions, along with the legal environment, labour market regulations, infrastructure development and enhancements to the overall business climate.

The rating agency said faltering domestic demand, a weak global trade environment, asset-quality challenges at banks and funding pressure on non-banking finance companies have contributed to economic slowdown. Fitch said it will later this month release its revised growth estimate for FY19-20 for India which will be significantly lower than the 6.6% forecast in June. It added that the policy measures taken will likely support a gradual recovery in FY20-21 and FY21-22. In contrast to the growth impact of tax cuts, the fiscal impact will be felt in this fiscal year and the corporate tax reduction will cost around 0.7% of GDP in lower revenue - about two-thirds to the central government and one-third for state governments.

As per the report, expenditure postponements are more difficult for the government given weak growth, and it expect the central government to miss its 3.3% of GDP deficit target for FY19-20 by about 0.4 percentage points. It expects a general government deficit of 7.5% of GDP, well above the 'BBB' category median of 1.9%. The rating agency said the general government debt ceiling of 60% of GDP is unlikely to be met by March 2025, as stipulated by the Fiscal Responsibility and Budget Management Act, as this would require significant deficit reduction. Besides, Finance Minister Nirmala Sitharaman had announced the lowering of the base corporate tax rate to 22% from 30% for companies.

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