India’s Budget Gap Seen Widening to Four-Year High on Tax Cuts

(Bloomberg) -- India’s budget gap is likely to widen to the highest since 2016 after Prime Minister Narendra Modi’s government unleashed $20 billion in corporate tax cuts to revive demand, according to a survey of economists.

The median of the survey of seven economists showed that India’s fiscal deficit may rise to 3.9% of gross domestic product in the year ending March 2020, compared with a target of 3.3% set in July. Finance Minister Nirmala Sitharaman on Friday announced a five percentage point cut in corporate taxes.

Read: India Cuts Corporate Tax in $20 Billion Boost to Growth

“There are key risks in terms of fiscal expansion and inflationary pressures building up,” said Shumita Sharma Deveshwar, Gurgaon, India-based economist at TS Lombard. “But there are few options available for the government at this juncture and drastic measures are needed.”

The tax giveaway spooked bond markets where yields surged amid fears of a fiscal slippage, which could draw the ire of rating companies such as Standard and Poor’s and Moody’s Investors Service. India’s combined deficit, which includes the federal government, the states and public sector enterprises, is estimated at about 8%.

Read: India’s Public Finances Are Getting Worse, Central Banker Warns

India’s central bank Governor Shaktikanta Das on Thursday told the Bloomberg India Economic Forum that there was limited space for the government to pursue expansionary policies.

“If you look at government borrowing together with public sector borrowing, there is little fiscal space,” Das said. “There is little space for any fiscal expansion. It is important to do policy changes, focusing on ease of doing business, and structural reforms.”

Following are the survey results:

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