By India Ratings (FITCH Group)
Mr. Devendra
Kumar Pant
(Chief
Economist) India Ratings & Research
‘’The union budget
attempts to revive economic growth under the given macroeconomic constraint.
The government has given a fillip to household savings by raising the tax
exemption limits. It has also announced a slew of measures to push
investments.
We believe these
efforts should address the supply-side constraints, which have been adversely
impacting the economy and keeping the inflation rate high, particularly of food
products.
Continuation of
excise exemption in certain sectors till end-December 2014 and investment
allowance to MSMEs up to FY17 will also support growth.
The budget has shown
its commitment for fiscal consolidation and pegged the FY15 fiscal deficit at
4.1% of GDP. However, the budget arithmetic is slightly optimistic. The budget
has assumed a nominal GDP growth of 13.4% (FY14: 12.3%; FY13: 12.2%) and net
tax revenue buoyancy of 1.26, leading to net tax revenue growth of 16.9%.
Disinvestment target in FY15 is INR634.25bn (FY14: 258.41bn; FY13:
INR258.90bn). We believe the sanctity of the 4.1% fiscal deficit hinges on the
government achieving these targets, which at the moment looks hopeful.
Mr. Ananda
Bhoumik
( Senior
Director - Banks, India Ratings ) on Banks
‘’The enabling
provision for banks to raise long-term liabilities is welcome, particularly as
the exemption of cash reserve ratio (CRR) and statutory liquidity ratio (SLR)
is net interest margin accretive. The provision more than adequately
compensates banks for any tenor premium that they may pay on long-term bonds.
Ind-Ra had earlier
commented on the critical need for banks to raise long-term senior bonds to
better manage their asset-liability mismatches, which have grown to
unsustainable levels for some government banks. Investor appetite is likely to
be strong, as these instruments do not carry loss-absorption features.
The Finance Minister
mentioned a priority sector exemption for these instruments, which may need to
be clarified. Ind-Ra believes that banks should be left to decide on the
end-sector use of these funds, as any restriction on deployment may confuse
investors about the risk profile of these instruments.
The commitment to
bank consolidation and improve autonomy should increase the efficiency and
competitiveness of government banks. The proposal to tap retail markets for
Basel III equity suggests the government's reluctance to inject capital beyond
its current shareholding. This may put pressure on the ability of some weak
public sector banks to raise growth capital.
Mr.
Rajaraman Venkataraman
(Director –
Infrastructure, India Ratings)
Ind-Ra believes that
the budget carries a positive note for the infrastructure sector as a whole.
The proposals to relax CRR/SLR requirements for infrastructure bonds and set up
infrastructure investment trusts by banks are intended to deepen debt market
and create a risk appetite for infrastructure investments. The government's
emphasis on public–private partnership projects for attracting investments in
airports and seaports reinforces its XII plan commitments to the overall
sector.
The 8,500km target
for award of roads projects for National Highways Authority of India is
ambitious, given the achievements during the last two years. However, it
accentuates the government's assurance to enhance the pace of attracting
investments.
Assuring coal
availability for the existing capacities is a positive for thermal power
plants. This is likely to infuse confidence among foreign investors and
lenders, including banks. The budget clearly focuses on the need for renewables
and we believe that this is a step in the right direction.
The budget proposals
display a commitment to revitalise the sector as a whole and inject investor
confidence into the sector.
Mr. Rakesh
Valecha
(Senior
Director- Corporates, India Ratings) on Corporates
As articulated in the
Corporate Risk Radar FY15, the overall corporate profitability is unlikely to
improve significantly over the next two to three quarters.
However, uncertainty
because of the fluctuating Indian currency, which in our opinion remains the
biggest risk, may reduce given the roadmap drawn out for fiscal consolidation
in the budget. We continue to believe that any improvement in private
consumption during FY15 will be driven by rural consumption while urban
consumption will continue to disappoint.
From a corporate
performance perspective, the focus of the budget can be split into two parts i)
to spur demand in the short term and b) to articulate a long-term plan to
incentivise corporates to invest in India.
The outlays drawn out
for infrastructure and incentives provided for real estate (deductions and
REITs) address the short-term growth aspects while reducing some of the stress
in these sectors. The outlays would also provide some uptick in demand for
steel and cement.
While fundamentally
demand needs to pick up to spur the next level of capex, some extension of
incentives on capex could propel corporates to start investing by 3QFY15. The
intent to clear some bottlenecks in the manufacturing and infrastructure
sectors could provide for a better investment climate in the long term.
For Media Contact
Saraanya Shetty
Manager - Corporate
Communications and Investor Relations
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