Uncertainty over tax issues may impact investments: Moody’s

NEW DELHI: Uncertainty around tax issues could be impacting investments in the country, ratings agency Moody’s has said, and warned that a ‘monsoon shock’ is a risk to the economy. The global ratings agency had recently raised its outlook on India Baa3 rating to positive from stable. “Uncertainty around tax issues is a deterrent to investments,” Moody's vice president Atsi Sheth told reporters at a media briefing, even as she added that it’s an issue left over from the previous government.
The tax department has sent notices to many foreign portfolio investors (FPI), levying minimum alternate tax (MAT) on their profits, triggering a massive row and charge of aggressive taxation. Seth said a “monsoon shock” presents a near-term risk, a day after the metrological department forecast a sub-normal rainfall of 93% of long-term average, but added that it was not a ratings issue.

The key risks of sub-normal monsoon are a spike in food inflation, further deterioration in rural demand and government policies such as expansion of subsidies that put pressure on the country’s finances. “What the rating currently incorporates is policies to address these vulnerabilities to monsoon. India is unique among countries in the impact that drought tend to have on inflation and growth,” Sheth said.

“Our expectation is that slowly policies will be put in motion to address these vulnerabilities over the coming years. So, the rating will be impacted by inability to pursue those policies, in terms of irrigation, infrastructure, food distribution,” she said. ICRA’s senior economist Aditi Nayar pointed out that the monsoon prediction was an early forecast and also better than the 88% rainfall last year. Sheth said a big support for India’s rating was the political willingness to take a dip in growth to address the issue of inflation, which if controlled will have many beneficial impacts down the years.

These are sticking to a fiscal and monetary discipline. She said India was growing much higher than its peers. “What is positive for India is political willingness to take a longer term reform measures. A 7.5% growth rate for current fiscal is a good growth and in the present scenario higher than 7.5% growth is not sustainable,” Sheth said. On the upgrade in outlook on India’s rating despite lack of visible improvement, Sheth said the ratings agency was looking at longterm growth prospects, with a fiveyear horizon. “Constraints appear to be easing,” she said, adding that inflation was improving and current account is much better.