New Delhi: India’s Budget 2021-22 provides for pro-growth measures that will support credit quality across sectors in the near term, but at the expense of fiscal consolidation, a report by Moody’s Investors Service said.
The budget calls for a narrowing of the Centre’s fiscal deficit to 6.8 per cent of GDP in FY22 from an estimated 9.5 per cent in FY21.
“While the headline deficit projections are larger than we expected, they reflect both credible budgetary assumptions and greater transparency than in past budgets,” said William Foster, a Moody’s Vice President and Senior Credit Officer.
“The budget’s focus on higher capital spending, financial sector reform and asset sales will help stimulate growth, but implementation risks remain and slower fiscal consolidation will constrain fiscal strength over the medium term.”
As per the report, the financial sector will undergo some credit positive reform under the new budget.
“Banks will benefit from the establishment of an asset reconstruction company to resolve legacy problem loans, and public sector banks additionally from an INR200 billion capital infusion.”
“Meanwhile, the increase in the limit on foreign direct investment in insurers to 74 per cent from 49 per cent will unlock new sources of funding and access to external know-how.”
“Privatisation of one insurer and two banks will be credit negative for those companies as it will reduce ongoing government support but will make them more market-oriented.”
According to the report, tax incentives and other measures to increase consumption are credit positive for non-financial companies, with stronger demand in the housing and automobile sectors to carry over to other sectors such as steel.
“High public spending on highways and railways is also credit positive for infrastructure companies, with the capital outlay for highways up 26 per cent from the previous year.”
“Finally, Indian securitisation transactions will benefit from regulatory changes that will allow for quicker debt recovery, and from interest deductions on affordable home loans that will increase borrower debt servicing ability.”
