Moody's Investors Service says that the landslide victory by the opposition Bharatiya Janata Party (BJP) in India's elections is credit positive for both its sovereign profile and corporate sector, while the effects for its banks are currently limited, although the credit profiles of public-sector banks may experience positive effects from 2015.
Moody's believes that the new government's strong mandate-which shows an overwhelming majority of 334 seats in India's 543-member Lower House for the BJP-led National Democratic Alliance (NDA)-increases the possibility of a stable central government that will pursue a shared economic agenda to address India's macroeconomic challenges.
Moody's conclusions were contained in a just-released report, titled ''India's Decisive Election Outcome Is Credit Positive'' as part of today's Moody's Credit Outlook.
From a broad sovereign perspective, the results of the election-announced on May 16 for polls carried out from April 7 to May 12-will have the immediate effect of sustaining investor sentiment, which has also recently boosted India's equity indices and the rupee.
''Moody's also considers that the completion of the election will allow stalled policies relating to the corporate and infrastructure sectors to resume, a credit positive for the country's corporates,'' says Vikas Halan, a Moody's vice president and senior credit officer.
''Moody's notes that India raised diesel prices immediately after the voting, the first such move since the previous government halted regular price increases in March, and we expect further price hikes in the months ahead,'' says Halan.
Such price rises will be credit positive for oil marketing companies as they will reduce spending on fuel subsidies and lower these companies' borrowing requirements.
Moody's also expects that the new BJP-led government will increase natural gas prices, which would benefit upstream oil and gas companies and provide greater long term incentives for investment. Gas prices were originally scheduled to almost double in April, but the previous government put that increase on hold because of the elections. This delay has meant that India's upstream companies have been losing large amounts of revenue, and a timely increase in gas prices would therefore cushion revenues and help revive interest in offshore exploration.
''A strong majority government would also increase the likelihood of structural reform in India's ailing power sector. Closer co-ordination between the central and state governments on clearances for mega projects and land use, two proposals outlined in the BJP's manifesto, would address investment delays,'' says Halan.
''On the other hand, as indicated, the immediate effect of the new government on the credit profile of the banks will be limited with the key issue facing the sector being the high level of impaired loans in their corporate portfolios,'' says Srikanth Vadlamani, a Moody's vice president and senior analyst.
''Moving into 2015 and beyond, we see more significant scope for policy to positively affect the credit profiles of public-sector banks. In the interim budget for the fiscal year ending 31 March 2015, the previous government budgeted capital infusions totalling Rs 110 billion, lower than year-earlier levels,'' says Vadlamani.
''In this environment, Moody's believes that there is a reasonable chance that the BJP-led government will infuse a higher amount of capital this year than what had been allocated in this interim budget, which would be a credit positive for public-sector banks,'' adds Vadlamani.
