Rating firm S&P Global said on Friday India's move to cut corporate tax rates was a "credit negative development" despite potentially boosting the economy as it will widen its fiscal deficit. The cuts are likely to "boost sentiment and support the broader economy at a time when momentum is flagging", said Andrew Wood, director of sovereign and international public finance ratings at S&P Global Ratings. "Nevertheless, we believe that the cuts will invariably lead to higher central and general government fiscal deficits, absent equivalent revenue generating measures," Wood told Reuters.
The government slashed corporate taxes on Friday, giving a surprise $20.5 billion break aimed at reviving private investment and lifting growth from a six-year low that has caused job losses and fuelled discontent. The news sent shares sharply higher while bond yields spiked to a near three-month peak on speculation that the government may have to borrow more to meet its expenditure needs. The measures will mean a revenue loss of 1.45 trillion rupees for the current year.
India is likely to miss its fiscal deficit target for the current financial year, despite receiving an additional dividend from the central bank, five government officials and advisers told Reuters this month, as tax collections have sunk amid a sharp slowdown. The sources had said the government could, toward the end of 2019, be forced to raise the fiscal deficit target to 3.5% of GDP from 3.3% after economic growth fell to a six-year low of 5% in the April-June quarter. Rating firm Moody's, however, said India's move will boost net income of companies and was "credit positive" for them.
The "extent of final impact on credit profiles of Indian corporates will depend on whether they utilise the surplus earnings for reinvestment in business, debt reduction or high shareholder returns," said Vikas Halan, senior vice president of corporate finance group at Moody's Investors Service. The government has been trying to boost private capital expenditure which has struggled due to a lack of recovery in corporate earnings and a sharp drop in consumer demand.