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Income tax return relief, cash for farmers to boost growth in India: Moody's

Feb 06, 2019, 16:54 PM IST
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Moody's Investors Service said on Tuesday that the income tax return relief and direct cash transfer programme for farmers will give a fiscal stimulus of about 0.45 per cent of GDP, and support growth through increased consumption, though at a fiscal cost. 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.

 

 

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It said that while the middle-class income tax return 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.  Image source: Reuters

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"Together, the direct cash transfer programme for farmers and the middle-class tax relief measures will contribute a fiscal stimulus of about 0.45 per cent of GDP, which will support growth through consumption over the near term, albeit at a fiscal cost," Moody's said.  Image source: Reuters

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The government has budgeted for total expenditure growth of 13.3 per cent annually in 2019-20 from 14.7 per cent in the current fiscal, resulting in an increase in total spending to about 13.25 per cent of GDP from 13 per cent of GDP this fiscal. The government has budgeted for gross tax revenue growth of 12.4 per cent annually in 2019-20 from 17.2 per cent this fiscal.  Image source: Pixabay

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"Based on the government's nominal GDP growth assumption of 11.5 per cent, 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.  Image source: Pixabay

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The government budgeted an increase in GST revenues to 4 per cent of GDP in 2018-19 from 2.6 per cent in 2017-18. However, the revised estimate is 3.4 per cent of GDP in 2018-19 and 3.6 per cent of GDP in 2019-20, it said.  Image source: Reuters
 

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"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.  Image source: PTI

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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.  Image source: Reuters

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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.  Image source: PTI

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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. Image source: PTI
 

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"Ongoing fiscal slippage from spending and tax cut proposals ahead of election is credit negative for the sovereign," Moody's said.  Image source: PTI

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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.  Image source: Reuters

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