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Tax relief for middle-class, direct cash transfer to farmers to support growth: Moody's

Expressing hopes on India's growth, global credit ratings agency, Moody's Investors Service has said that the tax relief steps for the middle-class and direct cash transfer programme for farmers will give a fiscal stimulus of about 0.45% of Gross Domestic Product (GDP), and support growth through increased consumption over the near term, albeit at a fiscal cost. Monitoring that fiscal slippage from the budgeted targets for the past two consecutive years is 'credit negative' for India, Moody's said the government will face challenges of meeting its target again next year and this does not bode well for medium-term fiscal consolidation. It said while the middle-class tax relief will weigh somewhat on direct tax revenues, GST collections will continue to pose risks to indirect tax collections if they fall short of budgeted expectations.

The rating agency also said that based on the government's nominal GDP growth assumption of 11.5%, this implies a tax buoyancy of about 1.08, which they consider to be achievable. However, similar to last year, there are risks to the downside in 2019-20. besides, it said 'Recent adjustments to the Goods and Services Tax (GST) framework will make collections more challenging ... The changes will further shrink the tax base, constraining potential future increases in tax revenue, because SMEs represent the vast majority of businesses in India'.

Moody's further said ongoing fiscal slippage from spending and tax cut proposals ahead of election is credit negative for the sovereign. It said the ongoing fiscal slippage from the budgeted targets over the past two years, and their expectation that the government will face challenges meeting its target again in fiscal 2019, does not bode well for medium-term fiscal consolidation. However, it said that lack of a formal capital support plan for public sector banks is credit negative. The budget does not include any provisions for capital support for public sector banks (PSBs). Meanwhile, the budget also does not address last year's announced merger of three public sector non-life insurers, which creates ambiguity around their merger plan.

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