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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