Budget 2016 negative for public-sector banks: Moody’s
The budget 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
India’s recently announced Union Budget for the financial year 2016-17 is positive for most of its sectors, but negative for public-sector banks, Moody’s said in its report on Thursday. “Commitment to fiscal consolidation is positive for the sovereign, but deficit reduction will remain challenging. 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% over the next two years,” Moody’s said in its Credit Outlook report. “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,” it said. Last month, Finance Minister Arun Jaitely unveiled the Union Budget for the financial year 2017 (ending on March 31, 2017). The global research body, which has given India a Baa3 positive rating, said an insufficient allocation of capital to the country’s public-sector banks will have a negative impact on the sector. The non-performing loans of the public-sector banks will require significant amount of capital, and its absence will be a key credit weakness for the sector. “Capital allocation aside, plans to create a roadmap for the consolidation of such banks and improve operating conditions for asset reconstruction companies are likely to be credit positive for India’s banking sector upon implementation,” it said. Pointing out tax and duties changes, Moody’s said announcements made during the Finance Minister’s budget speech are positive for energy and commodity producers, but negative for automakers. A changed tax rates on crude oil will reduce cash production costs for Oil and Natural Gas Corporation Ltd. (ONGC), Oil India Limited (OIL) and Cairn India Limited (unrated), while a raised duties on aluminum products and zinc alloy shall provide a marginal benefit to Indian miners and abolished duties on iron ore exports. The research body also expressed concerns on the impacts on the country’s infrastructure sector – the government announced a fund allocation of Rs.2.21 lakh crore for the sector – and said the sector will benefit from the spending; however, infra projects authorised from April next year will not benefit from a tax holiday, thereby affecting the sector in a negative way. “The doubling of the clean energy tax will not have a direct effect on rated power companies such as NTPC Limited and the Tata Power Company Limited, but the tax hike will raise the overall cost of power generation, and implies an additional burden on state-owned power distribution companies and unregulated power generation companies,” Moody’s said. The budget didn’t address any significant measure to address structural fiscal challenges including the government’s low tax revenue base and its vulnerability to economic shocks. This means that material improvements to the country’s public finances will largely be limited in the coming years. However, Moody’s praised the government’s prolonged commitment to fiscal consolidation and said the target set by the Finance Minister Arun Jaitely is largely positive. The government has maintained fiscal deficit target of 3.9% during 2016-17, 3.5% in fiscal 2017-18 and 3.0% in fiscal 2018-19.
March 04, 2016 | 06:15pm IST
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