No Moody swings, India rating in place

International rating agency Moody’s Investors Service said the Interim Budget has “populist elements which are not prudent from the fiscal point of view,� and the government may find it difficult to achieve the tall growth target.
At the same time, Moody’s has said the Interim Budget will not impact India’s rating. “We have already made our rating decision. This budget is anyway only for four months,� said Moody’s senior vice-president, Kristin Lindow. Moody’s recently upgraded India’s foreign currency by a notch to investment grade. Standard & Poor’s had also recently improved India’s foreign currency outlook from negative to stable, but did not react to the budget announcements.
“Obviously, compromises were made in making this budget,� said Ms Lindow. Commenting on the refinance to the agriculture sector, she said, “It creates distortions in the economy, which already has distortions in favour of agriculture.� However, she said the measures in the past two weeks suggest commitment to reforms and were “balanced.�
But she was not very optimistic on the government’s GDP growth target of 7.5-8%. Pointing out that this year’s growth was unusually high, Ms Lindow said the government was assuming an even faster growth rate. R Ravimohan, managing director of Crisil, India’s largest agency, also feels the fiscal targets for next year are too optimistic. “The fiscal deficit of 4.8% of GDP is under control, but next year’s target of 4.4% may be stiff and difficult to achieve,� he said.
Mr Ravimohan said while this year saw a robust growth in agriculture and manufacturing, next year would be challenging. “There is some concern about the merger of dearness allowance with basic salary for central government employees and it could have an adverse impact on the fiscal,� he added.
A report issued by Crisil says the measures in the Interim Budget could hurt bank profits by lowering margins and increasing non-performing assets. “The scheme, for instance, factors in a moratorium on payments for a one-year period. Agricultural sector assets account for 11% of the total for the banking system,� the report said.
But considering that some of these are not concrete measures and are either exhortations from the finance minister, or plans that are still on the drawing board, the future of bank profits will depend on how many of these measures are actually implemented.
PK Choudhury, managing director, Icra, feels there are very few major announcements which could be of interest to the market or industry. “The urgent need of infrastructure growth was highlighted, but no major step was announced, except for the power sector where the tax concession has been extended till ’12,� he said. Tea and shipping are the other industries which stand to gain. “The concessional financing to small tea gardens could help some of the closed tea gardens to re-open. The fiscal concession for shipping industry could make them internationally competitive,� he said.