Steps to help MSMEs will increase risk of fiscal slippage: Moody's Investors

Moody's Investors Service has said the steps announced by the government to aid MSMEs and farmers will increase the risk of fiscal slippage and push deficit to 3.4 percent of GDP in the current financial year, said a report by PTI.

"Over the past month, India’s government has announced a range of policies to support the incomes of small enterprises and low-income households. In the absence of new revenue-boosting measures, the policies will collectively make it harder for the government to achieve its fiscal consolidation objectives,” it said.

For instance, doubling the exemption threshold under the goods and services tax (GST) to Rs 40 lakh annual turnover, along with earlier cuts in tax rates, would erode the revenue base in the near term, Moody’s said.

The direct fiscal cost of these measures will be small as business with annual revenues of up to Rs 40 lakh account for a minor fraction of the total GST collection. However, raising the tax exemption limit on GST will shrink the tax base further, constraining potential future increase in tax revenue, it said.

The US-based rating agency added, "If implemented, such proposed government measures will cause further slippage from India's fiscal consolidation road map, which targets reducing the central government's deficit to 3.1 percent and three percent of GDP in fiscal 2019 and fiscal 2020, respectively.”

It added that achieving deficit reduction through unpredictable revenue sources denotes weaker fiscal policy effectiveness. Moody’s advocated consolidation through durable and predictable revenue sources such as tax revenue.

The agency said that the government is also considering a number of measures to support farmers who are facing financial difficulties due to low crop prices. These include the introduction of a new direct income support scheme, a revamped crop insurance scheme, and agriculture crop loans at zero interest rates.

ALSO READ:

RBI sets up MSME expert committee under ex-SEBI chief UK Sinha

MSME loans upto Rs 25 Cr can be restructured, no downgrade in asset classification: RBI