Moody’s thumbs up to Budget 2013

New Delhi: Days after it cautioned against a negative credit outlook for India, given its widening current account deficit and the spurt in its external debt, credit rating agency Moody’s Investors Service on Monday gave a thumbs up to Budget 2013, terming it credit positive for the sovereign rating of the country.

Citing the concessions extended to Indian industry and the initiatives to revive infrastructure, the rating agency was positive towards a revival of investment sentiment in the economy.

The announcement came just ahead of finance minister P. Chidambaram’s post-budget interaction with industry lobby groups, where he disclosed his intent to launch a fresh round of international roadshows to woo foreign investors.

He will also travel across India to seek out fresh investment and popularize the underlying message of the budget, which was announced on 28 February.

The sympathetic view of the rating agency will no doubt help the finance minister make out a better case to foreign investors. To be sure, unlike rival rating agencies Standard and Poor’s (S&P) and Fitch Ratings, Moody’s has so far maintained a stable credit outlook on India’s sovereign rating.

S&P, which had warned India that it risked having its sovereign rating lowered to junk status, or non-investment grade, had said in a statement on Thursday after the budget announcement that its sovereign rating outlook for India remained unaffected by the budget announcement.

Chidambaram opted for sharp spending cuts to contain the fiscal deficit, or gross government borrowings, at 5.2% in the fiscal year ending 31 March and promised to lower it to 4.8% in the next fiscal.

Moody’s said the plan of modest fiscal consolidation is credit positive for the sovereign rating because, against a backdrop of subdued growth in the gross domestic product (GDP) and forthcoming elections, it is a realistic effort to correct India’s macroeconomic imbalances.

The rating agencies will be watching out for what happens to India’s growth trajectory as this will determine whether the government can stick to the fiscal deficit targets, said D.K. Srivastava, chief policy adviser at Ernst and Young.

“Particularly, the concern is, since the reduction in fiscal deficit hinges on reduction in capital expenditure, it may in turn affect growth momentum,” he said.

However, Moody’s cautioned that the quality of government expenditure reductions was sub-optimal. The government capped growth in Plan expenditure at 4.1% against a budgeted 26.3% in 2012-13, while actual subsidy spending grew 17.3%, compared with a budget forecast that it would shrink by 15% during the same year.

Moody’s also pointed out that the budget estimates for 2013-14 may be optimistic. The fiscal 2014 budget assumes nominal GDP growth of 13.4% and total revenue growth of 23.4%, including a doubling of revenue from divestments. It also anticipates total expenditure growth of 16.4%, with 29% growth in planned spending and a 10% reduction in subsidy spending.

“Achieving such targets will be challenging. In particular, India’s divestment revenues have generally been lower than what the government has budgeted. Furthermore, there are still no indications that GDP growth (and hence tax revenues) will accelerate to the extent the government expects,” it added.

India’s economic growth is projected to slow to a decade’s low of 5% in the year ending 31 March, mostly due to a drop in gross fixed capital formation, a proxy for the investment rate, from 32.9% of GDP in 2007-08 to a projected 29.9% in 2012-13. In the third quarter (October-December) of the current fiscal year, GDP growth decelerated to 4.5%.

Chidambaram said in his budget speech that the government would improve the communication of its policies to remove any apprehension or distrust in the minds of investors, including fears about undue regulatory burdens or application of tax laws, to attract more investment.

During the post-budget interaction with industry groupings on Monday, Chidambaram said he would be visiting the five metros and Hyderabad to address the concerns of investors in the next few weeks. In March and April, he will also visit Japan, Canada and the US to woo foreign investors. This will be Chidambaram’s second set of roadshows after he visited Hong Kong, Singapore, London and Frankfurt earlier this year to address concerns of foreign investors.

The finance minister further said the first objective of the budget was to signal to the world and to India that the county was on the path of fiscal consolidation. “In my view, there was nothing more important than that. We were at a point where (if) we did not take credible measures towards fiscal consolidation, there would be very severe consequences,” he said.

Chidambaram also said the government will go to Parliament to introduce amendments related to indirect transfers only after it settles the Vodafone case. Industry has been demanding clarification on what will constitute a “substantial” presence in India.

Section 9 of the Income-Tax Act facilitates levy of tax on an overseas transfer of shares, when a substantial part of the underlying asset is situated in India.

“This (clause related to substantial assets) is in a way tied to the Vodafone case. This amendment was inserted by the Finance Act 2012 along with the amendment arising out of the Vodafone case. What we have decided is whatever decisions taken on the basis of the (Parthasarathi) Shome committee decisions, we will have to go back to Parliament. We have decided the appropriate time to go to Parliament is after we have resolved the Vodafone case,” Chidambaram said.

The Shome committee, constituted to look into retrospective amendments in last year’s budget, had recommended that if more than 50% of the total value derived from assets of the company or entity are in India, only then will it be liable to pay tax in the country.

The finance minister does not necessarily need to wait to resolve the Vodafone issue before providing clarity on provisions in section 9, said Dinesh Kanabar, deputy chief executive and chairman (tax) at consultancy KPMG India. “The need to provide clarity on what constitutes substantial is not related to Vodafone. It relates to all prospective transactions. Investors would like to know if any overseas transaction is liable to be taxed in India,” he added.

Answering questions on Monday on a Google+ hangout, a virtual platform where multiple users can simultaneously video chat with each other, Chidambaram said public sector units (PSUs) sitting over piles of cash have to achieve investment targets they have set or pay a special dividend to the government. “For next year’s capital expenditure, we have just sent out the letters to PSUs. Each PSU has to fill out the pro forma and tell us what their capex targets are for next year. We are going to monitor it very closely beginning from April. Every quarter, I will monitor what they are investing, and if they don’t invest, we will hold the CMD (chairman and managing director) to account,” he said.

Surabhi Agarwal contributed to this story.