Reforms set to boost consumption, won’t hit fiscal numbers: Moody’s

New Delhi: The recently announced Goods and services tax (GST) reforms will boost private consumption and support economic growth of India at a time when the country is facing pressure from high US tariffs, rating agency Moody’s said Tuesday.

The reform may impact revenue buoyancy in the short term; it says, however the foregone revenue will not significantly impact fiscal math and Moody’s expects India to slow down capital expenditure to help fiscal consolidation.

The rating agency added that along with income tax exemption, the rate cut will significantly boost private consumption. “Both measures aim to boost household consumption, which accounts for about 61% of GDP,” Moody’s said.

However, Moody’s expects revenue foregone to be higher than the government’s own estimation of ₹480 billion ($5.4 billion) due to GST 2.0.

This estimate includes a calculation of both gross foregone revenue from the lowering of the effective GST rates, as well as the additional revenue generated by the introduction of the new 40% tier. “The foregone revenue is likely to be higher than government estimates,” the report said, adding that the strain will be even more pronounced in the coming years because the new tax structure will be effective over the course of a full year rather than the remaining six months of the current fiscal year.

It added that the centre will manage the fiscal consolidation with slow spending in the remaining part of the current financial year.”As much of the acceleration in spending has likely been driven by the government’s imperative to ameliorate the under-execution in capital expenditure in fiscal 2024-25, we expect spending growth to slow over the next two quarters, helping to preserve the trend of fiscal consolidation,” Moody’s said.The report also added that they do not expect any significant revenue-enhancing measures over the remainder of its term, which will keep the government debts under pressure.

India continues to have the weakest debt affordability among investment-grade sovereigns, with interest payments amounting to about 23% of general government revenue in fiscal 2024-25.