India's 2017 budget moderately 'credit positive', Moody's says

India’s fiscal 2017 budget, released on 29 February, is moderately ‘credit positive’ for most sectors, but efforts at deficit reduction will remain challenging, according to Moody’s.

In its assessment of the Indian budget, the ratings agency said measures announced were credit negative for public sector banks due to insufficient allocation of capital for the sector, as the government has stuck to the capital infusion road map announced last year, budgeting INR250bn (£2.62bn) in capital injections.

“The budget's changes on tax and duties changes are credit positive for energy and commodity producers, but negative for automakers. Changes to levies on crude oil will lower cash production costs for national oil companies, but will not compensate for the impact of lower oil prices,” Moody’s added.

Increased duties on primary aluminium, aluminium products and zinc alloy should provide a marginal benefit to Indian miners, as will the abolished duties on the export of iron ore fines, it said further.

However, the introduction of a levy on passenger cars will raise prices across the automobile sector and potentially weigh on sales volumes for local manufacturers, Moody’s noted.

The ratings agency further says that infrastructure players will benefit from a boost in spending, but not all are winners; for example, a rise in public infrastructure spending that is partly financed through the introduction of a levy on motor vehicles is credit positive.

On the other hand, infrastructure projects commissioned from April 2017 onwards will no longer benefit from a tax holiday, which will be negative for the sector.

Atsi Sheth, associate managing director for the sovereign risk group at Moody’s, said, “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.

"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. 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."

Finally, Moody’s deemed the budget to be 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.