Budget 2015-16: A Reasonable Roadmap to Spur Medium-term Growth – India Ratings

Budget 2015-2016: A Reasonable Roadmap to Spur Medium-Term Growth: India Ratings

 

Devendra Kumar Pant , Chief Economist, India Ratings   & Sunil Kumar Sinha, Principal Economist, India Ratings    

India Ratings & Research (Ind-Ra) believes that the government through the present budget has mainly been looking at accelerating growth and investments in the economy.

Focus on ease of doing business in India by simplifying business procedure/indirect tax structure, laying down a four-year timespan to reduce corporate tax to 25% from 30%, encouraging financial savings as opposed to physical savings, securing better life for senior citizens are all aimed at reinvigorating and strengthening the green shoots visible in the economy.

Ind-Ra believes that the creation of a national infrastructure fund and higher allocation to road and railways are also steps in the right direction. 

However, the main worrying factor is the quality of fiscal deficit, which has shown no signs improvement according to the FY16 budgeted estimate. The Economic Survey 2014-15 advocated for improving the quality of fiscal deficit. Ind-Ra is of the opinion that FY16 growth number looks plausible. However, the success of 3.9% fiscal deficit target hinges on the economy growing around 8% and achieving the disinvestment target of INR695bn. The government missed the FY15 disinvestment target by INR320.75bn.

 A sectoral analysis is as follows:

Corporates - Rakesh Valecha, Senior Director, India Ratings  

Removal of tax exemptions and simplification of the process of direct corporate taxation bode well for the corporate sector in the long term, says Ind-Ra. These measures, when implemented over the next four years along with the formulation of the Bankruptcy Law during FY16, could be a key driver to attract investments into the country.

Corporate India would show a steady improvement in capacity utilisation in the short term, driven by improving demand primarily from increased public spending on rural areas, infrastructure and other social obligations. Given the leverage issues plaguing corporate India, the push towards infrastructure would provide potential to corporates with healthy balance sheets to take advantage of these growth opportunities.

However, a critical determinant for the performance of corporates in FY16 would be the continuation of low crude and commodity prices along with stability in currency. Higher fiscal deficit may necessitate a lower-than-expected reduction in interest rates, which could delay the improvement for several stressed/close to stressed corporates who are showing signs of bottoming out.

Banks -  Ananda Bhoumik  Senior Director, India Ratings  

Negative Impact on Mid-sized PSBs: 

The proposal of Rs. 79.4 bn for the capitalisation of public sector banks is lower than Ind-Ra’s expectation of Rs. 200bn. 

This modest allocation, along with recent differentiation in infusion based on performance, could be negative for the growth of mid-sized PSBs which account for about 30% of system assets. The decision on the actual allocation to banks has been deferred to the Bank Board Bureau, which is planned to be set up.

Positive for Private Sector Banks and Large PSBs: 

Ind-Ra believes the reduction of corporate tax rate to 25% from 31% earlier may improve banks’ return on assets by 6bp over the next four years. The budget has proposed a few measures to improve the asset quality prospects for banks - 

(i) GDP growth uptrend confirmed, which should help growth prospects in cyclical sectors including metals 

(ii) The National Infrastructure Fund is expected to support equity funding to viable projects, thereby improving the prospects of restructured accounts 

(iii) The long-awaited strengthening of the bankruptcy code and improving judicial capacity aims to improve the long-term recovery prospects from NPLs. These are positive for the asset quality of banks and business prospects of asset reconstruction companies.

Positive for NBFCs: 

It was refreshing to see the government looking beyond banks to encourage credit delivery. The new ‘Mudra Bank’ for refinancing microfinance institutions and including large NBFCs under the Sarfaesi Act are structural changes that will improve the viability of these growing intermediaries. 

The Sarfaesi Act will enable large NBFCs to fund SMEs and mid-corporate businesses with lower loss prospects. The Gold Monetisation Scheme could moderate the demand for gold loans; however, the details of the scheme are awaited.

Infrastructure -  Rajaraman Venkataraman , India Ratings 

The Union Budget 2015-16 well addresses a gamut of infrastructure issues relating to its adequacy, financing, regulations, ease of investments and rebalancing of risks among the government and private sectors, Ind-Ra believes. 

However, the budget could have been even more impactful had it addressed the core needs of the stranded thermal power capacities, ways of release of the lenders’ capital stuck in these assets and the future of private investments in thermal power, especially the merchant projects.

The proposal to reallocate risks as well as revitalise investments in public private partnerships stresses the government’s intention for the need of private capital into the sector. 

The proposal to create a national investment and infrastructure fund with a government’s annual equity of  Rs. 200bn could provide the much-needed impetus in deepening the infra-bond market and balancing the leverage profile well between banks and the capital market that links the assets. That said, the modalities of funds flow into the trust and its investments will have to be monitored, given that investment vehicles such as infrastructure development funds and infrastructure investment trusts have not generally achieved their stated ambitions.
 
The proposed ‘plug and play’ (PP) approach of the government in respect of approvals and clearances, if implemented, should help lenders bear only the funding risks appropriate to them, as against the current equity and construction related risks.

We believe the announcement regarding five ultra-mega power projects (2,0000MW) on a PP model will help achieve the government’s ‘power for all’ programme at a faster rate. The current sagging domestic investment sentiment could help vitalise foreign investor interest in the sector. 

Cost efficiencies on ultra-mega power projects could re-profile the generation capacities in terms of cost. Similarly, the completion of the 1,00,000 km of roads under construction and the announcement of new roads for 1,00,000 km with all approvals in place will redefine the transportation infrastructure by introducing newer models of concessions and widen the developer-base in the country. We believe the tax-free status for infrastructure bonds for the roads sector will be allowed for public private partnerships. This will go a long way in deepening the infrastructure debt market.

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