Moody's now says India's economic potential 'high'

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SME Times News Bureau | 25 Aug, 2015
Precisely a week after it lowered India's growth forecast for this year, Moody's on Tuesday said the country's economy reflected some growth potential and even hinted at a ratings upgrade it sees some progress in reforms and macroeconomic indicators.

"India's Baa3 government bond rating reflects strong growth potential of its large and diverse economy, balanced against recurrent inflation, high fiscal deficits as well as regulatory and infrastructure constraints on competitiveness," Moody's Investors Service said.

It said that in April 2015, the outlook on India's rating was changed to positive from stable, based on the view that proposed and implemented policies could lower sovereign credit risk, calm inflation, improve regulations, increasing infrastructure spend and improve fiscal ratios.

"The rating could be upgraded if the above expectations are reflected in policy progress and macroeconomic indicators over the next year, and if we view this progress as sustainable," the agency said, but with a caveat.

"However, the rating outlook would likely return to stable if: there is a slowdown in or reversal of the policy reform process, if banking system metrics continue to weaken, or if there is a decline in foreign exchange reserves coverage of external debt and imports."

A week ago on Aug 18, the agency said fears over deficient rains in the current monsoon season and gradual progress of reforms have prompted it to lower India's growth forecast for this year by 50 basis points to 7 percent.

But in the latest report, the mood seemed optimistic.

"We assess India's economic strength as 'High' relative to all other sovereigns we rate. The size of its economy, its growth rate and our expectation of continued strong economic growth support this assessment," it said in Tuesday's report.

"India's GDP of $2,051 billion places it in top decile of all Moody's-rated sovereigns and its investment ratio is also at the higher end among rated sovereigns. The economy's scale insulates it to some degree against global or domestic trends that could otherwise hurt growth."

It felt, India as an importer will benefit from a low commodity price environment, and its reliance on domestic demand for GDP growth shielded the economy, somewhat, from the subdued outlook for global growth.

The other findings of the Moody's report:

- World Bank Governance Indicators highlight weakness in governance

- Inflation targeting framework increases policy transparency

- Mixed progress on reforms highlight challenges of India's political system

- Fiscal position suffers from low tax revenue base and lack of expenditure flexibility

- Food subsidies increasing their share of expenditure, reform is planned but will be difficult

- High government debt and interest ratios lower fiscal strength

- Government debt structure mitigates sovereign credit risk

- Political risk is low

- Government liquidity risk is very low, Banking sector risk is moderate

- External vulnerability risk is low.