Tax relief for the middle class and measures to boost farmers' incomes announced in the interim Budget for 2019-20 are credit positive for India's asset-backed securities (ABS) and residential mortgage-backed securities (RMBS), Moody's Investors Service said.
In a report published on Tuesday, analysing the overall impact of Budget on corporates, infrastructure, financial institutions and structured finance, the US credit rating agency said the measures will help improve performance of Indian ABS and RMBS because they will help borrowers remain current on their payments and reduce default risk.
However, Moody's said that the measures aimed at boosting growth pose risks to fiscal consolidation.
"Ongoing fiscal slippage from spending and tax cut proposals ahead of general elections is credit negative for the sovereign. India's (Baa2 stable) government announced an interim Budget that increases spending to provide income support for small farmers and introduces a middle-class tax cut in advance of the country's general elections in April and May," Moody's said.
"In light of these budget measures, the government announced slippage from its original fiscal deficit targets to 3.4 per cent of GDP both for the fiscal year ending in March 2019 (fiscal 2018) and for fiscal 2019, which ends in March 2020.
Ongoing fiscal slippage from the budgeted targets over the past two years, and our expectation that the government will face challenges meeting its target again in fiscal 2019, does not bode well for medium-term fiscal consolidation," the report added.
While saying that the proposals are positive for the real estate sector, the report noted that they will negatively impact 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. For 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. The proposal to supplement farm incomes will be positive overall for companies with exposure to rural consumption," the report stated.
It said that the lack of a formal capital support plan for public sector banks (PSBs) is credit negative. The Budget does not include any provisions for capital support for PSBs. Meanwhile, the budget also does not address last year's announced merger of three public sector non-life insurers, which creates ambiguity around their merger plan.
Modest increase in public spending for infrastructure is credit positive, Moody's said.
"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.
The budget does not include any change in taxation structure for companies in the infrastructure sector," Moody's said.