Moody's Investors Service has described the Budget as moderately credit positive for most sectors except public-sector banks, but warned that deficit reduction will remain challenging.
"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 percent over the next two years," Atsi Sheth, a Moody's Associate Managing Director for the Sovereign Risk Group, said in a note.
She however said the Budget proposals do 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 means, any deficit reduction will come from either cyclical upswings or tactical fiscal management, rather than a broad-based fiscal consolidation strategy, she said.
According to the report, the Budget is credit negative for public sector banks due to the insufficient allocation of capital for the sector, as the government has stuck to the capital infusion roadmap announced last year, budgeting just Rs 25,000 crore in capital injections next fiscal.
According to Capitaline data, gross non-performing assets of 39 listed banks surged to Rs 4.38 trillion in the December quarter, up from Rs 3.4 trillion in the previous quarter. Most of this is contributed by state-run banks.
The only silver-lining in the Budget was that the government was open to infuse more capital into them as and when needed.
The report warned that the increased recognition and provisioning for NPAs will require a corresponding front-ending of capital requirements, which suggests that capital constraints will remain a key credit weakness for public sector banks.
On the changes in tax and duties, she said they are credit positive for energy and commodity producers, but negative for automakers, while changes to levies on crude oil will lower cash production costs for national oil companies, and will not compensate for the impact of lower oil prices.
The report further said infrastructure will benefit from a boost in spending, but not all are winners. For instance, the hike in Excise duty on automobiles to fund public infrastructure spending is credit positive.
The securitisation market is also set to benefit from the changes in the distribution tax for securitisation trusts, as this will improve investors' post-tax returns and make investments in such products more appealing, leading to new class of investors entering the market.
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