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India's fiscal slippage for two consecutive years credit negative, says Moody's

Lack of a formal capital support plan for the public sector banks (PSBs) was also credit negative, middle-class tax relief and measures to boost farmers' incomes are credit positive for Indian asset-backed securities and residential mortgage-backed securities.

PTI | New Delhi, Tuesday, February 5, 2019 | 17:17 IST

Moody's Investors Service on Tuesday said fiscal slippage from the budgeted targets for the past two consecutive years from tax cuts and spending ahead of the general election is credit negative for India.

In the Interim Budget 2019, the government proposed to increase the spending to provide income support for small farmers and introduce a middle class tax cut in the run-up to the Lok Sabha elections to be held between April and May.

In the light of these budget measures, the government announced a slippage from its original fiscal deficit targets to 3.4 per cent of the GDP, both for the fiscal years ending March 2019 and March 2020. "Ongoing fiscal slippage from spending and tax cut proposals ahead of elections is credit negative for the sovereign," Moody's said.

Lack of a formal capital support plan for the public sector banks (PSBs) was also credit negative. The Budget did not include any provisions for capital support for the PSBs. It also did not address last year's announced merger of three public sector non-life insurers, creating ambiguity around the merger plan, the United States-based rating agency said.

Also Read: India's sovereign rating profile to be evaluated based on post-election Budget: Fitch

On cross-sectoral analysis of the Budget, Moody's said the proposals were positive for the real estate sector but negative for state-owned oil and gas companies. "The Budget includes both direct and indirect benefits for the real estate sector and will likely help boost property demand," it said.

For the state-owned oil and gas companies, a planned increase in expected proceeds from dividends and disinvestments, in addition to an under provision of fuel subsidies, is negative, it added. Further, modest increase in public spending for infrastructure is credit positive. The planned increase in public infrastructure spending is credit positive for companies in this sector. Capital outlays for key segments within infrastructure, like highways and railways, will increase modestly in fiscal 2019 from fiscal 2018.

Besides, middle-class tax relief and measures to boost farmers' incomes are credit positive for Indian asset-backed securities (ABS) and residential mortgage-backed securities (RMBS) because they will help borrowers remain current on their payments and reduce default risk.