Acuite Ratings on Wednesday said there is still a significant scope to limit India's fiscal deficit to 3.5 to 3.6 per cent if the government gives high priority to disinvestment and there is a sustainable revival in consumption and market sentiment, expected to be brought in by the sharp cut in corporate taxes up to 10 per cent over the next two quarters.
The government is already working on the disinvestment of a few large public sector companies. If the equity markets respond well to the efforts made to revive economic growth, the government may succeed in exceeding the disinvestment target of Rs 1.05 lakh crore.
Acuite's analysis further suggests that over and above the use of the 'escape clause' under the Fiscal Responsibility and Budget Management Act 2003, which permits an additional 0.2 per cent slippage, any sharp increase in the fiscal deficit triggered by the liberal corporate tax cuts can be offset by the special dividend from Reserve Bank of India (RBI), additional non-tax revenues brought about by the cuts and a likely reduction in interest obligations due to larger rate reductions by RBI than expected in the budgetary figures.
The cut in base corporate taxes from 30 to 22 per cent for existing companies and for new manufacturing companies at 15 per cent is expected to spur a revival in the economy, which has recorded one of the lowest rates of growth over 20 years in Q1 FY20. Acuite said it has been consistently reiterating the need for fiscal measures in the context of strong headwinds in both the domestic and the global economy.
The corporate tax rationalisation measures along with the ongoing accommodative monetary policy of RBI should help to boost corporate savings and translate into higher demand as also a pickup in private sector investments over the medium term. However, such economic advantages notwithstanding, the booster package comes at a cost to the fiscal commitments.
While the government has estimated that it will have to forego Rs 1.45 lakh crore of tax revenues, the actual shortfall may be even higher in the context of weaker consumption and lower indirect tax revenues than the budgeted figures. The market, therefore, anticipates a significant slippage in the fiscal deficit from the proposed 3.3 per cent to a figure closer to 4 per cent.
Acuite, however, believes that the fiscal position can be significantly better than what the fiscal mathematics suggests if there is a focus on augmenting non-tax revenues. Already, there has been a windfall gain of Rs 59,000 crore over and above the budgeted Rs 90,000 crore dividend income from RBI in the current fiscal.
The government has an aggressive disinvestment target of Rs 1.05 lakh crore in the current year. This can be exceeded if the government targets the disinvestment of large and profitable PSUs such as the oil companies over and above the planned ones such as Air India.
Clearly, such a disinvestment programme has to scout for interested global players who may be keen to make an entry into India, thereby translating into big-ticket foreign investments. Further, non-tax revenues such as dividend and dividend taxes should witness an uptick in the current year.
With higher post-tax profits, PSUs are expected to declare higher dividends and the government should also gain from higher dividend taxes from improved private-sector profits and dividends.
Acuite expects such additional inflows in the order of Rs 20,000 crore to 30,000 crore. "Our calculations further indicate that the government will be able to save on interest expenses to the extent of another Rs 59,000 crore given the lower bond yields and an expectation that yields will go further lower as inflation continues to sustain at moderate levels.
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