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Moody’s cuts India outlook to ‘negative’, Govt says macro stats strong

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New Delhi, Nov 8 : Global rating agency Moody’s Investors Service on Friday cut India’s outlook from ‘stable’ to ‘negative’ reflecting increasing risks to the country’s economic growth and the government’s failure in addressing long-standing economic and institutional weaknesses.

The government however, said that India continues to be among the fastest growing major economies in the world, and its relative standing remained unaffected. BSE Sensex was down 168.17 points at 10.45 a.m.

Moody’s only adds to the growing list of global agencies, including the Reserve Bank of India, that have downgraded the India growth story for the same reasons. Fitch Ratings and S&P Global Ratings still hold India’s outlook at ‘stable’.

Moody’s also affirmed India’s Baa2 foreign-currency and local-currency long-term issuer ratings. Baa2 is the second-lowest investment grade score, and the agency said it could downgrade the nation if fiscal metrics deteriorate materially.

Warning that India could be heading for a debt trap and recessionary phase, the agency said it doesn’t expect the credit crunch among non-bank financial institutions, the main source of consumer loans in recent years, to be resolved quickly.

At a six-year low, India’s economy grew only 5.0 per cent year-on-year between April and June, its weakest pace since 2013, as consumer demand and government spending slowed amid global trade frictions.

Backing its other ratings for India, the agency said it estimates that the country’s growth slowdown is in part long-lasting.

However, the Finance Ministry rejected the claim, saying: “India continues to be among the fastest growing major economies in the world, India’s relative standing remains unaffected. IMF in their latest World Economic Outlook has stated that the Indian economy is set to grow at 6.1 per cent in 2019, picking up to 7 per cent in 2020. As India’s potential growth rate remains unchanged, assessment by IMF and other multilateral organisations continue to underline a positive outlook on India.”

“The government has undertaken a series of financial sector and other reforms to strengthen the economy as a whole. The government has also proactively taken policy decisions in response to the global slowdown. These measures would lead to a positive outlook on India and would attract capital flows and stimulate investments.

“The fundamentals of the economy remain quite robust with inflation under check and bond yields low. India continues to offer strong prospects of growth in the near and medium term,” the Finance Ministry add.

The downgrade now puts additional pressure on India, which tried to revive demand in the economy in September with an unexpected cut in corporate taxes. But chances of more such reforms have diminished, and Moody’s expects the government to struggle to narrow its deficit or contain a growing debt burden.

According to Moody’s, “investors and rating agencies will closely monitor the nation’s gross domestic product data (for Q2) for signs of further and long-lasting weakness, which could result in another negative shift. Stabilisation in the non-bank financial sector, meantime, would be credit positive and could flag less risk of negative spillover into banks”.

“Moody’s decision to change the outlook to negative reflects increasing risks that economic growth will remain materially lower than in the past, partly reflecting lower government and policy effectiveness at addressing long-standing economic and institutional weaknesses than Moody’s had previously estimated, leading to a gradual rise in the debt burden from already high levels,” the rating agency said in a statement.

“While government measures to support the economy should help to reduce the depth and duration of India’s growth slowdown, prolonged financial stress among rural households, weak job creation, and, more recently, a credit crunch among non-bank financial institutions (NBFIs), had increased the probability of a more entrenched slowdown,” it said.

Moody’s has also cut India’s GDP growth forecast for the current year to 6.2 per cent, citing factors such as weak hiring, distress among rural households and tighter financial conditions.

Almost every major global financial institution has trimmed India’s growth forecast ever since the country’s GDP growth rate slipped to a six-year low of 5 per cent in the April-June quarter and the Reserve Bank of India (RBI) slashed GDP growth estimate for the current fiscal to 6.9 per cent from the previous estimate of 7 per cent, in the wake of slowdown in demand and investment.

The International Monetary Fund (IMF) last month slashed India’s GDP growth rate projections to 6.1 per cent from the 7 per cent it forecast in July.

S&P Global Ratings last month also lowered India’s Gross Domestic Products (GDP) forecast to 6.3 per cent for the current financial year from 7.1 per cent projected earlier, on the back of decline in private consumption.

“India’s slump is deeper and more broad based than we expected. In the March-June quarter, the economy expanded by just 5 per cent, below potential, which we estimate to be north of 7 per cent. Most alarming has been the precipitous decline in private consumption growth that had been the engine of the economy in recent years – down to about 3 per cent in the March-June quarter,” the global rating agency said in a recent report on the Asia-Pacific region.

On the government’s effort to revive economy through cut in corporate taxes, it said it would cost the exchequer 0.7 per cent of the GDP, though the net impulse would be smaller, with the government eliminating some exemptions.

The Asian Development Bank had in July slashed India’s growth projection to 6.5 per cent from 7 per cent for the current year on the back of fiscal shortfall concerns.

The World Bank has cut India’s GDP growth for 2019-20 to 6 per cent in its latest South Asia Economic Focus report. “India’s cyclical slowdown is severe,” said the report. It has projected the growth rate for 2020-21 at 6.9 per cent, and for 2021-22 at 7.2 per cent .

In April, the World Bank had forecast a growth rate of 7.5 per cent for India, but in 2018, it pegged the rate lower at 6.8 per cent.

The indicators from other rating agencies started coming in June, when Fitch Ratings cut India’s growth rate projections to 6.6 per cent from 6.8 per cent. Later on September 20, the Organisation for Economic Co-operation and Development (OECD) also revised its forecasts for India, lowering it by 1.3 percentage points from its previous projection in May to 5.9 per cent.

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PSUs may pick stake in merged PFC-REC entity to keep 51% govt holding

Another option may be to get the LIC and one of the power sector PSUs to pick up 5 per cent each in the merged entity.

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PFC Merger

New Delhi, Feb 19 : State-run financial institutions or public sector enterprises such as LIC, NTPC, NHPC may pick up a stake in the Power Finance Corporation (PFC) to prevent government shareholding in the power sector financier from falling below the threshold 51 per cent level post merger with the REC.

The PFC, which bought 52.63 per cent of government equity in REC last March, is looking to merge the entity with itself. However, the exercise has been delayed by a year for want of viable options.

As per current regulations, 51 per cent government holding is needed to maintain the PSU character of an organisation. Post the PFC-REC merger, the government shareholding in the merged entity is expected to fall to about 42-43 per cent taking the company outside the PSUs fold.

“Various options are being looked at by Deloitte which has been appointed as a consultant to see through the completion of the merger. The option before it is to extinguish or reduce the liability on any of its (government) shares in respect of capital not paid up or cancelling any paid up capital that is lost or unrepresented by available assets. But, equity dilution in favour of another PSU would also work well as it will keep direct and indirect holding of government above 51 per cent level in merged entity,” said a government official privy to the development.

Under the plan, power sector companies may be permitted to pick up to 10 per cent equity in the new entity created after REC merges with PFC. Companies such as NTPC, NHPC, or the PowerGrid Corporation may be the likely candidates for this investment.

Sources also said that government may also consider going in for investment by the Life Insurance Corporation (LIC) in the merged entity to maintain the PSU character of PFC.

Another option may be to get the LIC and one of the power sector PSUs to pick up 5 per cent each in the merged entity.

In March 2019, the PFC acquired government’s 52.63 percent stake, or 104 crore shares, in another state-owned power financier REC at Rs 139.5 a piece, along with the transfer of management control. The cost of acquisition was Rs 14,500 crore.

PFC Chairman and Managing Director Rajeev Sharma had then said the PFC-REC merger would be next on the agenda and the process would be started in ongoing fiscal year. But with complications arising over government shareholding, the process has got delayed and merger may now be completed in the first quarter of next financial year (FY21).

The merger of two largest state-owned power sector financiers will create a common platform for lending to the sector. The PFC will benefit from the exercise as it would get access to the wide geographical reach of the REC and will also be able to leverage the expertise of REC in distribution and transmission.

The REC, on the other hand, will be able to leverage the expertise of PFC in the power generation space.

The merger will also facilitate resolution of stressed assets as the entity would be equipped with a wider pool of information.

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Wishful thinking to target $5 tn economy by 2025: Manmohan

Pathways can emerge only through solid dialogue and discussions on the challenges of taking the country forward, he added.

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Manmohan singh

New Delhi, Feb 19 : Lashing out at the government for its lack of focus, former Prime Minister Manmohan Singh on Wednesday termed the Centre’s hopes of turning India into a $5 trillion economy by 2024-25 as “wishful thinking”.

“Today the government does not want to acknowledge the word slowdown. This is not a good sign,” he said after releasing “Backstage – The Story Behind India’s High Growth Years” by former Planning Commission Deputy Chairman Montek Singh Ahluwalia.

“In such a scenario, raising India to become a $5 trillion economy by 2024-25 is wishful thinking”, he said.

Pathways can emerge only through solid dialogue and discussions on the challenges of taking the country forward, he added.

At the same time, he expressed the hope that there will be a debate for carrying forward the economic reforms innitiated.

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Research and development activity to get hit as WD benefit to cease from FY21

According to experts, R&D activity is a key proponent of the ‘Make in India’ strategy and to further expand the manufacturing sector in the country.

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Research and development activity

New Delhi, Feb 19 : India Inc’s R&D activity might get adversely impacted as weighted deduction (WD) benefits, including those on capital expenses, stand withdrawn from the next fiscal.

Till now, the Income Tax Act allowed for weighted deduction for all R&D activities.

However, four years back a sunset provision was introduced in the Budget on the availability of weighted deduction from April 1, 2020.

This deadline was expected to have been extended in this year’s Budget. However, that did not happen.

“The weighted deduction was a key reason for entities to invest in R&D infra. This withdrawal will impact future investments in this area,” said Amarjeet Singh, Senior Partner, International Tax and Regulatory, KPMG in India.

According to experts, R&D activity is a key proponent of the ‘Make in India’ strategy and to further expand the manufacturing sector in the country.

Besides, R&D investments into India have grown with many MNCs establishing their research bases here.

“The ‘Make in India’ programme has got the booster of a reduced tax rate. Similarly, had the government continued with the weighted deduction for R&D, it would have surely ensured that India marched ahead both in manufacturing and in the corresponding R&D,” said Gukul Chaudhri, Partner, Deloitte India.

“So, while India may not lose its tag as the R&D lab of the world, the availability of weighted deduction would have ensured that India continued as one of the most attractive destinations for R&D in the world,” Chaudhri added.

The Finance Act, 2016, restricted the availability of expenditure incurred on scientific research to 150 per cent from April 1, 2017, and no weighted deduction from April 1, 2020.

“Globally, most countries are encouraging R&D activity as it generates new ‘intellectual property’ (IP), which in turn creates sustainable revenues. Such IP or new product gives rise to a new industry and other supporting activities,” said Samir Kanabar, Partner, Tax and Regulatory Services, Ernst & Young.

“In India, several sectors like auto, pharma etc. have invested substantially in R&D facilities to develop new IPs, patents and hence, a new tax regime to boost R&D was a major expectation,” Kanabar added.

However, Suman Chowdhury, President, Ratings, Acuite Ratings and Research, said that the reduction in weighted tax deduction will not have any significant effect on India Inc’s R&D activity.

“India’s R&D activity has held steady at 0.7 per cent of GDP over 5 years and no visible signs of positive outcomes were seen emanating from private enterprises despite such benefits,” Chowdhury said.

“Nevertheless, corporates now enjoy a reduced effective corporate tax structure, which should more than compensate for the loss, at least for the manufacturing sector. Service oriented enterprises, whose business model thrives on innovation, do not require incentives to do R&D in our opinion,” Chowdhury added.

(Rohit Vaid can be contacted at [email protected])

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