Steps to help MSMEs, ease farmers' distress increase risk of fiscal slippage: Moody's

Moody's Investors Service Friday said the steps announced by the government to aid MSMEs and the measures being planned to support farmers will increase the risk of fiscal slippage and push deficit to 3.4 per cent of GDP in the current financial year.

The government had budgeted the fiscal deficit for the current financial year at 3.3 per cent of the gross domestic product (GDP). However, in the April-November period, the deficit touched 114.8 per cent of the budget estimates.

Moody's said meeting the 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 denote 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.

It said the measures come ahead of India's parliamentary general election. The authorities have presented them as permanent measures which would have a long-lasting impact on the country's public finances, it said.

"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 per cent and 3 per cent of GDP in fiscal 2019 and fiscal 2020, respectively," it said.

The US-based rating agency said while 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, to bridge budget shortfalls, the positive impact on the country's government finances 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," Moody's said.

It said the decision to double the exemption threshold under the goods and services tax (GST) to Rs 40 lakh annual turnover with effect from April 1 along with earlier cuts in tax rates would erode the revenue base in the near term.

These adjustments will reduce the burden on small and medium enterprises (SMEs), a segment particularly hard hit by GST. The direct fiscal cost of these measure will be small as business with annual revenues of up to Rs 40 lakh account for a minor fraction of the total GST collection