Chennai–Global credit rating agencies — Moody’s Investors Service (Moody’s) and Fitch Ratings — termed India’s fiscal budget for 2016-17 as credit positive for sovereign rating, but pointed out certain uncertainties.
“The budget is modestly credit positive for the sovereign, since it indicates a continued commitment to gradual fiscal consolidation by bringing down fiscal deficits to 3 percent over the next two years,” said Atsi Sheth, a Moody’s associate managing director for the Sovereign Risk Group, in a statement.
“However, the proposals did not contain significant measures to address structural fiscal challenges, such as the government’s low tax revenue base and the vulnerability of government finances to economic shocks,” added Sheth.
“This situation suggests that any deficit reduction will come from either cyclical upswings or tactical fiscal management, rather than a broad-based fiscal consolidation strategy,” Sheth said.
According to Moody’s while the budget is moderately positive for most sectors, it is negative for public sector banks.
The credit rating agency said the budget is credit negative for public sector banks due to its insufficient allocation of capital for the sector, as the government has stuck to the capital infusion road map announced last year, budgeting Rs.25,000 crore in capital injections.
However, increased recognition and provisioning for non-performing loads (NPL) will require a corresponding front-ending of capital requirements, which suggests that capital constraints will remain a key credit weakness for public sector banks, Moody’s said.
The budget’s changes on tax and duties are credit positive for energy and commodity producers, but negative for auto-makers.
Finally, the budget is positive overall for India’s securitisation markets as changes in the distribution tax norms for securitisation trusts will improve investors’ post-tax returns and make investments in securitisation products more appealing, which could attract a new class of investors to the asset class.
According to Fitch Ratings, the budget contains a number of elements that could be positive from a sovereign rating perspective over the medium term, but uncertainties regarding implementation of the reform agenda and meeting targeted revenue growth remain.
Fitch Ratings said the Indian government retains its vision on how to structurally improve the economy and create sustainable growth and cited reforms relating to financial sector, agriculture and liberalisation of the foreign direct investment regime announcements.