Tax cut will put more pressure on fiscal deficit: Moody’s

February 25th, 2009 - 2:29 pm ICT by IANS  

New Delhi, Feb 25 (IANS) The excise and service tax cut announced by the government Tuesday will heighten concern about India’s large public debt and result in higher fiscal deficit, the research arm of global rating agency Moody’s said Wednesday.
Excise and service tax was cut by 2 percentage points, while the previously announced 4 percentage point reduction in excise duty was extended beyond this fiscal year.

“Although the tax cuts will inject much needed support into the economy, they may heighten concerns about the country’s already large public debt. The fiscal deficit is set to end up much larger than the official projection,” said Sherman Chan, economist with Moody’s

“The alarming fiscal position will put upward pressure on funding costs. Investor confidence, which has already been hurt by the global financial turmoil, is set to further weaken as the government struggles to manage the fiscal imbalance,” she said.

Investment growth is set to slow notably this year. Capital outflows are also likely to continue in coming months, putting downward pressure on the rupee.

Moody’s expects the rupee to linger around $49 at least until midyear.

According to the research agency, India’s growth momentum is easing, and policymakers have to support the economy. However, it noted, the Reserve Bank of India (RBI) ought to take steps to revive the economy as the government was cash-strapped.

“For growth to remain strong, the central bank needs to ensure ample liquidity and low interest rates. Inflation has markedly decelerated in recent weeks, and interest rates must follow suit to maintain a loose monetary policy stance. The RBI is expected to keep trimming the repo rate in coming months, to 4 percent or even lower,” Chan said.

Moody’s expects the GDP numbers for the December and March quarters to be downbeat. Growth in the previous quarter, which will be revealed later this week, is likely decelerate sharply to around 6.1 percent year on year, it said.

Moody’s forecasts a further slowdown in the March quarter, which should take annual growth to around 6.8 percent for 2008-2009.

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