Fitch raises India's FY20 fiscal deficit forecast to 3.6% of GDP

Fitch Solutions on Wednesday raised India's fiscal deficit forecast to 3.6 percent of the GDP for this fiscal year, from 3.4 percent previously, due to weak revenue collections resulting from sluggish economic growth and government's sweeping corporate tax rate cut.

Fitch said it was revising the fiscal deficit forecast as revenue collection is likely to fall far short of the projections in the FY2019/20 Union Budget due to weak goods and services tax (GST) and corporate income tax collections.

"At Fitch Solutions, we are revising our forecast for India's central fiscal deficit to come in at 3.6 percent of GDP in FY2019/20 (April-March), from 3.4 percent previously, reflecting our view for a larger slippage versus the government's 3.3 percent target.

"We believe that this will mainly be due to weak revenue collection as a result of sluggish economic growth and the government's sweeping corporate tax cut in September amid no intention to reduce fiscal spending," it said.

The government on September 20, had announced that it would be slashing corporate income taxes for domestic companies to 22 percent from 30 percent previously. This would bring effective corporate tax rate, including all additional levies, to about 25.2 percent, for companies which are not receiving any incentives or exemptions.

New manufacturing companies formed after October 1, will enjoy a 15 percent (effective rate of 17 percent) corporate income tax rate, versus 25 percent previously.

The move is estimated to result in Rs 1.45 lakh crore in revenue loss for the government during FY2019/20.

"We are revising our revenue growth forecast to 8.3 percent (from 13.1 pe cent previously), which is significantly below the government's budget projection of a 13.2 percent growth," Fitch said citing sweeping corporate tax cuts and weak GST collections and import tariffs as the reason for the same.

Corporate tax accounts for 28 percent of total receipts. Therefore, the sharp reduction in tax rates will drag heavily on revenue collection.

"Separately, we expect weak private consumption growth to weigh on GST collection and this is already being reflected in the growing shortfall in GST collections thus far in FY2019/20," it said.

Besides, private consumption growth more than halved to 3.1 percent year-on-year in Q1 of FY2019/20 from 7.2 percent year-on-year in Q4 of FY2018/19 largely due to the collapse of a dominant Non-Bank Finance Company (NBFC) in the industry, the Infrastructure Leasing & Financial Services Ltd (IL&FS), in September 2018, it added.

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