Moody's slashes India outlook
New YorkMoodys Investors Service following Standard and Poors example lowered the outlook for India's ratings to stable from positive for the Ba2 foreign currency country ceiling, and to negative from positive for the Ba2 rating assigned to the Republic of India's domestic currency debt.

Moody's said that the changes reflected concerns that the long-anticipated deepening of macroeconomic reforms had not materialized, indeed, it expressed fears that future implementation of needed adjustments would be imperiled by the domestic and global economic slowdown and the fractured cohesion of the coalition government. Chronic failures to meet deficit targets, disappointing delays in privatisation of public sector undertakings, and growing contingent liabilities on off-budget appropriations have raised concerns that fundamental adjustments will only come in an atmosphere of crisis. The agency pointed out that the recent financial problems at UTI and IFCI highlight the need to improve corporate governance at state-controlled institutions, and the urgency is not limited to lowering the fiscal costs of recurrent public sector bailouts. The complex regulatory regime, and lapses in contract enforcement allowed by bureaucratic discretionas illustrated by the imbroglio over the Dabhol Power Corporation have dampened domestic and foreign investor confidence.
Pointing out that the current account deficit, measured against nominal GDP appears very small, Moodys warned that this is attributable to the relatively closed economy and provides no guarantee that the external finances are healthy.
On the other hand, the agency acknowledged that the substantial foreign exchange reserves and quite low short-term government debt indicate a favourable liquidity position.
Nevertheless, Moodys says that its decision to remove the positive outlook on the foreign currency rating (assigned in October 1999) reflects its analysis that current and capital account inflows on the balance of payments will be insufficient to prevent a further rise in the countrys external debt liabilities.
Moodys said its main concern is the credit risk represented by the growing domestic debt burden and the longer-term consequences of past profligacy, thereby warranting a negative outlook on rupee-denominated debt securities of the government.
In addition, the diminished prospects for structural improvements in the Indian economy pose risks for the health of the external finances, and therefore Moody's has determined that a positive stance on the foreign currency country ceiling is no longer appropriate.
Following the change in the foreign currency country-ceiling outlook, the outlooks on the Ba2 foreign currency debt ratings of IDBI and Power Finance have been changed to stable from positive.
Also, the outlooks on the Ba3/NP foreign currency deposit ratings of the following banks rated by Moody's have been changed to stable from positive: SBI, BoB, BoI, Canara Bank, Central Bank, OCB, PNB and UBI.
Moody's indicated that this action does not affect the Ba2 foreign currency debt rating of ICICI Ltd, which remains on review for possible upgrade. The action also does not affect the Ba2 issuer rating of IFCI, which remains on review for possible downgrade.
As a consequence, the outlook on the foreign currency debt ratings of Industrial Development Bank of India (IDBI) and Power Finance Corporation (PFC) have been changed to stable from positive.
Moody's indicated that this action does not affect the foreign currency debt rating of ICICI Limited, which remains on review for possible upgrade, in line with Moody's revised policy on foreign currency country ceilings. The action also does not affect the issuer rating of IFCI Ltd, which remained on review for possible downgrade.

Reactions in the government
The finance ministry appears to be unfazed by the rating downgrade by Moodys. Terming the cut as premature, senior ministry officials said the markets have already discounted these ratings.
In any case, external debt is not a major part of the countrys borrowing programme and the downgrade should not have any major impact, they said.
The officials said the government has already put greater emphasis on improving the fiscal deficit situation and the results, they said, will be evident towards the end of this fiscal.
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Analysts rubbish downgrading, say macros strong
MumbaiThough Standard & Poors recent downgrading does not surprise analysts, there is a feeling among them that macro-economic indicators of the economy are strong enough to rubbish the move notwithstanding the fiscal deficit and government debt size. They say that the basic economical macros are strong such as high forex reserves, and per the latest figures published by the Reserve Bank of India (RBI), the country's forex reserves as on July 27 surged by $1.456 billion to $43.682 billion.
The country's current account showed a surplus of $772 million in the first three months of the financial year, as against a deficit of $1.160 million during the corresponding period of the previous fiscal.
There is enough liquidity in the system. Bank deposits grew by 5.2 per cent (Rs 50,456 crore) during the first three months of the financial year, as against a 5 per cent increase (Rs 40,561 crore) in the corresponding period of the last fiscal.
Short-term loans to India have decreased sharply. In the first quarter of the calendar year, short term loan stood at $383 million (negative), as compared to $128 million during the first three months of the last fiscal. Interest rates have dropped to historic lows. The 10-year paper yield has declined by more than a percentage point in the financial year so far to 9.32 per cent.
Corporate bond yields declined in a similar fashion. The yield of the five-year 'AAA' rated paper stands at 9.05 per cent.
Inflation rate is veering around a modest 5 per cent. For the week ended July 21, the WPI inflation rate stands at 4.96 per cent, as against 6.60 per cent during the corresponding period last fiscal.

There is however some bad news

Industrial growth in the current fiscal is at a 4-year low. Year-on-year growth of index of industrial production went down to 1.9 per cent in May.
The slow industrial growth pushed down the non-food credit off-take of the banking industry as it declined by Rs 3,126 crore, as against a gain of Rs 16,485 crore in the corresponding period of the previous fiscal.
Fiscal deficit during the first quarter of the current financial year was at Rs 4,218 crore -- 36 per cent of the budgeted figure of Rs 11,6,314 crore giving rise to the possibility of a major slippage in the fiscal deficit.
Fiscal deficit during the corresponding period of the last financial year was at Rs 25,073 crore (22.5 per cent of gross fiscal deficit during the year).
Central government's tax collection fell to Rs 16,835 crore, as against Rs 22,452 crore during the first three months of 2000-01. Non-tax revenue also fell to Rs 4,788 crore from Rs 7,897 crore.
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India, US move towards amicable trade relations, form policy panel
New Delhi--India and the US have agreed to set up a working group on trade policy as part of efforts to make trade relations more amicable between the two countries, in view of the upcoming World Trade Organization ministerial meet at Doha.
Also as part of the ongoing efforts, the US went half-way towards meeting a long standing Indian demand by restoring duty free imports of 42 items in the product categories of jewellery, leather and carpets.
Senior commerce ministry officials said more items would be included in the duty-free import list after India amends its patent laws.
At the same time, the US included a veiled threat, when officials maintained that failure to clinch a new round of trade negotiations at Doha would be to the detriment of developing countries.
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RBI recommends interest tax relief on PDs investment income
Mumbai--The Reserve Bank of India (RBI) has recommended that primary dealers (PDs) should be exempt from paying tax on interest income from investments to the ministry of finance (MoF).
The move follows the tax imposed on major state-run PDs on their interest income, and a representation on the same has been made by PDs through the Primary Dealers Association of India (PDAI) to the Central Board of Direct Taxes (CBDT) for the latters consideration.
Sources say, this representation assumes significance in light of the fact that in the last audit of the Comptroller and Auditor General (CAG) on PDs, a qualification towards provision for the said tax has been effected.
However, to a clarification sought by the PDs, the RBI had specified that tax need not be paid on interest income, but it was not taken into consideration by the I-T as notification was not there.
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Tax holiday for Maharashtra multiplexes
Mumbai-- The Maharashtra state government has taken a Cabinet decision to exempt entertainment duty on multiplexes. A tax holiday has been declared for the first three years for multiplexes.
Making this announcement at the Entermedia 2001 seminar organised by Confederation of the Indian Industry (CII), Maharashtra Chief minister Vilas Rao Deshmukh said, "The package is a for a period of five years. For the first three years, the owners of multiplexes will get 100 per cent exemption on entertainment duty and for the last two years, they will get a 75 per cent exemption."
In India, cinema continues to be an affordable and a popular mass medium for entertainment, with a very wide reach. Deshmukh said, "The situation is such that too many films are chasing too few theatre space. However, with the recent trend towards multiplexes, in the next three years or so, a number of new screens are expected to come up across the country and with the concept of townships gaining importance, there is likely to be a higher growth in this number. This will further accelerate the already rapid growth of this industry," he added.
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