Representational Pic
Representational Pic

NEW DELHI: Fitch Ratings expects India to miss its fiscal deficit target of 3.3% of GDP for the current financial year by about 40 basis points following last week's decision to reduce corporate tax rates, resulting in the loss of an estimated 1.45 trln rupees in tax revenue.

As a result, Fitch expects the overall general government deficit at 7.5% of GDP in 2019-20 (Apr-Mar), "well above" the median of 1.9% for the countries it rates 'BBB'.

"This represents a change in our view on the fiscal stance from the July budget and underscores our opinion that the general government debt ceiling of 60% of GDP is unlikely to be met by March 2025, as stipulated by the Fiscal Responsibility and Budget Management Act, as this would require significant deficit reduction," the rating agency said in a note today.

Fitch, which has a BBB- rating on India with a stable outlook, also warned it would cut its GDP growth forecast "significantly" after India's growth slumped to a 25-quarter low of 5.0% in Apr-Jun.

"...faltering domestic demand, a weak global trade environment, asset-quality challenges at banks and funding pressure on NBFIs (non-bank financial institutions) have all contributed to an economic slowdown," the agency said. At present, Fitch sees India's GDP growth in 2019-20 at 6.6%.

It will publish its updated India growth forecasts as part of its Global Economic Outlook later this month. However, Fitch did say that the policy measures announced by the government so far would "likely support a gradual recovery in FY21 and FY22".

"The interplay of growth and fiscal policy are an important element of our Indian sovereign rating assessment. Higher sustained investment and growth rates without the creation of macroeconomic imbalances could be positive for India's credit profile while a rise in the government debt burden could be negative," it said.

Fitch also called on the India government to do more to encourage foreign direct investments as the corporate tax rate was just one factor driving investment decisions. The list of additional measures included those related to the legal environment, labour market regulations, infrastructure development, and "enhancements to the overall business climate".

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