Moody's look at the credit implications for the Indian corporates, infrastructure companies
By Vikas Halan, VP - Senior Credit Officer, Corporate Finance Group, Moody's Investors Service Singapore:Although the new government's inaugural budget lacks transformational reforms, it includes a number of proposals that we consider credit positive for India's corporates. The budget's proposed tax changes and business-friendly initiatives aim to encourage much-needed investment in manufacturing and lower overall business costs, which would benefit all corporates. However, some of the proposals are statements of intention that require specific policies to be effective.
Investment allowance encourages spending on fixed assets. The government proposed that manufacturing companies investing INR250 million ($4 million) or more in plant and machinery between now and March 2017 be entitled to deduct 15% of the investment amount from their taxable income. This proposal will result in tax savings equal to about 5% of the investment amount, at the marginal tax rate of 33%. All Indian corporates that we rate would benefit from this tax concession.
Lower withholding tax on foreign-currency bonds will reduce the cost of offshore bond issuance. The government proposed reducing the withholding tax on interest payments for foreign currency bonds issued by Indian corporates to 5% from 20%. This will allow Indian corporates to access the international bond market at a lower effective cost, which is credit positive for them.
Review of retrospective tax cases will encourage foreign investment. Although rules on retrospective taxation would not change, the government has proposed curbing the use of these provisions to avoid creating fresh tax liabilities for companies. The government also pledged to implement a stable and predictable tax regime that will be investor friendly and spur growth. This is credit positive for corporates in India because it reduces the uncertainty created by retrospective changes to tax laws imposed in 2012, which created large tax liabilities for Vodafone Group Plc (A3 review for downgrade) and deterred foreign companies from investing in India.
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Introduction of a goods & services tax will benefit all corporates through administrative savings. The government also proposed introducing a uniform national goods & services tax by December 2014 to replace the labyrinth of different sales taxes currently in place in different states. This will reduce administrative costs for companies with operations in multiple states and is also credit positive. However, implementation is subject to risk because state governments will have to agree to forgo their right to impose a state-level sales tax.
Higher export tax on bauxite will boost supply for aluminium producers. The government proposed doubling the export tax on bauxite to 20%. The higher export duty will increase the availability of bauxite for domestic producers of aluminium and is thus credit positive for Vedanta Resources Plc (Ba1 stable), one of the country's largest aluminium producers.
Modestly higher fuel subsidy provision is positive for upstream oil companies. The government has marginally increased the provision for fuel subsidies in the current fiscal year to INR598 billion, up from INR573 billion in the February 2014 interim budget. The higher subsidy provision is credit positive for upstream companies Oil & Natural Gas Corporation Ltd. (Baa2 stable) and Oil India Limited (Baa2 stable) because it signals that the government will not ask them to share a higher portion of the subsidy burden this year. The total fuel subsidy is shared between the government and upstream companies on an ad-hoc basis, as the government decides.
Overhaul of subsidy framework would be credit positive for oil marketing companies. The government also proposed an overhaul of the subsidy framework, which would likely lower the overall subsidy burden.
Lower subsidies would be credit positive for the three state-owned oil market companies, Indian Oil Corporation Ltd (Baa3 stable), Bharat Petroleum Corporation Limited (Baa3 stable) and Hindustan Petroleum Corporation (unrated), because it would reduce their borrowing requirements. The oil marketing companies currently fund the subsidies themselves until the government reimburses them some three to six months later.
The decision to lower import taxes on petrochemical products has negative credit implications for some domestic petrochemical producers. The government has proposed reducing the import taxes on petrochemicals, including the tax on reformate to 2.5% from 10%, crude naphthalene to 5% from 10%, and ethane, propane, ethylene and propylene to 2.5% from 5%. The cut in import taxes is credit negative for domestic petrochemical producers including Reliance Industries Limited (Baa2 positive) because it will make imports cheaper.
By Ray Tay, Vice President - Senior Analyst, Project & Infrastructure Finance, Moody's Investors Service Singapore:
The budget for fiscal year 2015 (ending 31 March 2015) provides continued support for the power sector and includes several new private investment incentives, all of which are credit positive for India's infrastructure companies.
As expected, the budget extended an income tax holiday for power projects, a credit positive for the sector, which has been struggling with fuel shortages and low operating efficiencies. The incentive's extension beyond this year to fiscal 2017 affords more certainty to power project developers. We expect NTPC Limited (Baa3 stable) to benefit most given its plans to increase its generation capacity to 51gigawatts by the end of fiscal 2017, from about 43gigawatts currently.
The budget also promises to ensure an adequate supply of coal for coal-fired power plants commissioned by the end of fiscal 2015, but contained few specifics as to when this would be achieved. Coal-fired generation accounts for around 60% of capacity in power-deficient India and the lack of coal is a key structural challenge for power companies, which are running plants below capacity because of the shortage of fuel. We expect coal plants to remain undersupplied for at least the next one to two years given the inefficiencies affecting producers, such as Coal India (unrated).
Recognising the government's limited fiscal room to fund large infrastructure projects, the budget also identified areas where public-private partnerships (PPPs) would be implemented. Infrastructure sectors earmarked for PPP participation include metro and light rail systems, airports, gas pipelines and rural and urban infrastructure. However, given the spotty track record of PPP procurement and financing in India, we expect successful implementation to take time and further policy initiatives to address the shortcomings of earlier PPPs.
To help facilitate PPPs, the budget also contains complementary measures to encourage private-sector funding for these partnerships. These include measures to allow banks to provide long-term financing for infrastructure projects and tax incentives for infrastructure investment trusts.
Another bottleneck in PPP implementation is the capacity of the state and local governments and agencies responsible for procuring PPPs. As such, the proposal to create 3P India, an institution that will facilitate procurement, will enhance the effectiveness of PPP programmes. PPPs in India have a spotty track record, and although we believe this budget is a step in the right direction, successful implementation will take several years.
The new government's budget offers no bold structural reforms in the power sector to address problems related to the cost pass-through of imported fuels, the shortage of domestic gas for gas-fired power plants, as well as the long-term financial health of state electricity boards. These are policy issues that will require focus and dedication, and the new government has only been in office for six weeks.
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