India Economic reforms | Nirmala Sitharaman’s fiscal boost a week leaves many questions still unanswered

By Vrishti Beniwal

Finance Minister Nirmala Sitharaman has been announcing fiscal steps almost every week since August to help industries hit by the economy’s slowdown: from tax benefits for vehicle purchases to easing foreign investment rules.

Yet while cheered by businesses, the moves have left investors with several unanswered questions and worries about the fiscal deficit. Sitharaman’s biggest move was to slash corporate taxes, a measure that will cost the government $20 billion in tax revenue.

Across the world, governments are stepping up fiscal stimulus to bolster central bank efforts to support economic growth. However, in emerging markets like India, which is running twin deficits on its budget and current account, officials have to tread a fine line in keeping investors concerns at bay.

Here’s a look at some of the key outstanding questions about India’s fiscal plans:

What happened to the foreign currency sovereign bond?
After a surprise announcement in the July budget, the government appears to have shelved a plan for now to sell its first overseas bond. The proposal was met with opposition from the start, including from a top ally of Prime Minister Narendra Modi. Economic Affairs Secretary Atanu Chakraborty said Monday a global bond sale needs “very careful calibrations and deliberations before one enters in the market” and the process may take a long time to conclude. The government plans to sell rupee-denominated bonds in the second half of the fiscal year, according to its borrowing schedule released Monday.

What is the impact on the fiscal deficit?
An almost 10 percentage-point cut in the corporate tax rate will probably push up the deficit to 3.9% of gross domestic product for the year to March, far higher than the government’s target of 3.3%, according to a Bloomberg poll of economists. Sitharaman has said she’s sticking to the fiscal goal for now — which is one reason why the government kept its borrowing plan for the rest of the year unchanged on Monday — and would be reviewing it only at the end of the year. Data on Monday showed the deficit reached 78.7% of the budget estimate in the five months to August.

When adding the budgets of states, the deficit is seen climbing to 7.5% of GDP this fiscal year, according to Fitch Ratings.

How is the government spending its windfall from the RBI?
A slowing economy is putting pressure on tax collection, with Bloomberg economist Abhishek Gupta projecting a shortfall of as much as 450 billion rupees ($6.3 billion) in income tax collections in the current fiscal year. The Reserve Bank of India has come to the government’s rescue with a record 1.76 trillion-rupee transfer to help offset the shortfall. While Sitharaman has said she hasn’t decided yet how to use the RBI funds, the Finance Ministry has indicated its keen to use the windfall to cut reliance on borrowings rather than fund a stimulus package.

Will there be more fiscal measures?
So far, Sitharaman has rolled back a levy on foreign funds, injected $10 billion into banks, relaxed foreign direct investment rules, and merged state-run lenders. She also set up a fund to revive stalled housing projects and introduced a new tax refund program for exporters. The question now is what comes next. There are growing calls to lower personal income taxes to spur consumer spending, and reform land and labor laws. Teresa John, an economist at Nirmal Bang Equities Pvt. in Mumbai, said the “market would also like clarity on demand side measures to boost growth.” The finance minister, however, wants to see the impact of steps already taken before making her next move.

via India Economic reforms | Nirmala Sitharaman’s fiscal boost a week leaves many questions still unanswered

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