For Quick Alerts
ALLOW NOTIFICATIONS  
For Daily Alerts

MSME And Farmer Distress Measures Will Push Fiscal Deficit Further Says Moody's

|

Global credit rating agency, Moody's Investors Service, said last week that new steps announced by the government to aid MSMEs (Micro, Small and Medium Enterprises) and farmers hold the risk of pushing the fiscal deficit to 3.4 percent of the GDP for 2018-19. For the current fiscal year, the government has its fiscal deficit target set at 3.3 percent of the GDP, however, in the April to November 2018 period alone, the deficit touched 114.8 percent of the budget estimates.

 
MSME And Farmer Distress Measures Will Push Fiscal Deficit Further Says Moody's

According to the agency, meeting these short-term fiscal objectives through one-off sources of revenue, such as special dividend from the Reserve Bank of India (RBI), and cuts in capital expenditure would indicate low fiscal policy effectiveness.

 

"Over the past month, India's government has announced a range of policies to support the incomes of small enterprises and low-income households. It is also considering additional steps to support farmers facing financial distress. In the absence of new revenue-boosting measures, the policies will collectively make it harder for the government to achieve its fiscal consolidation objectives," Moody's said.

Pointing out that these are presented as permanent measures and come ahead of India's parliamentary general election, it said that these would have a long-lasting impact on the country's public finances.

"If implemented, the proposed measures will cause further slippage from India's fiscal consolidation road map, which targets reducing the central government's deficit to 3.1 percent and 3 percent of GDP in fiscal 2019 and fiscal 2020, respectively," it said.

Moody's said that in order to bridge the budget shortfalls, the government could accelerate stake sales in public sector banks and seek special one-off dividend payments or deferments of subsidy payments to government-related entities, including the RBI, but, any positive impact on the country's government finances from these would be short-lived. "Achieving deficit reduction through such unpredictable revenue sources denotes weaker fiscal policy effectiveness than if consolidation were achieved through more durable and predictable revenue sources such as tax revenue."

Earlier this month, the government doubled the exemption threshold under GST to Rs 40 lakh annual turnover with effect from April 1 to provide relief to small businesses that were hard hit after the implementation of the new tax system. The US-based agency said that along with other tax rate cuts that were announced previously, the revenue base is set to erode in the near term.

The agency added that the government is also considering a number of measures to support farmers who are facing financial difficulties due to low crop prices, including the introduction of a new direct income support scheme, a revamped crop insurance scheme, and agriculture crop loans at zero interest rates. "Without other expenditure rationalisation, higher subsidy spending on the agricultural sector will increase future fiscal deficits. Some of the measures under consideration, such as direct cash transfers to the agriculture sector, will reduce intermediaries and limit leakage in the system. However, the final design and implementation of the schemes will ultimately determine the size of any efficiency gains," Moody's said.

It further noted the challenges the government was facing with regards to income that the government had expected to earn from divestment of central public sector enterprises (CPSEs). Between April to December 2018, proceeds from divestment only amounted to 42.7 percent of the Rs 80,000 crore target plan set by the government. In November 2017, Moody's had raised India's sovereign rating from the lowest investment grade of 'Baa3' to 'Baa2' and changed its outlook to stable from positive citing improved prospects of growth driven by reforms.

Story first published: Monday, January 28, 2019, 10:27 [IST]
Company Search
Get Instant News Updates
Enable
x
Notification Settings X
Time Settings
Done
Clear Notification X
Do you want to clear all the notifications from your inbox?
Settings X