India recently decided to cut corporate tax rates to boost the economy, which is at the same time also aimed at enhancing job opportunities. However, as per the Rating Firm S&P Global, it is a “credit negative development” and can also widen the fiscal deficit.
That said, cuts are likely to boost the momentum which is currently flagging, said Andrew Wood, director of the sovereign and international public finance ratings at S&P Global Ratings.
However, where on one hand it will boost the economy, on the other, cuts will invariably also lead to higher central and general government fiscal deficit.
The government slashed corporate taxes, on a move to revive private investment and lifting growth from a six-year low that has caused job losses and fuelled discontent.
This however, isn’t going to be easy as to meet the future expenditure needs, the government may have to borrow more. These measures would mean a revenue loss of about 1.45 trillion rupees for the current year.
In spite of receiving an additional dividend from the central bank, India may miss its fiscal deficit target for the current financial year.
Rating firm Moody’s, however, said that this recent move from India will boost net income of companies and was “credit positive” for them.
According to Vikas Halan, senior vice president of the corporate finance group at Moody’s Investors Service, the kind of the impact on credit profiles of Indian corporates would differ and generally depend on factors such as debt reduction, high shareholder returns, among others.
Due to a lack of recovery in corporate earnings and a decline in consumer demand, the government has tried to boost private capital expenditure, as it has the potential to change things in the upcoming months.