India hopes for rating upgrade, Moody's talks outlook

Agency says recent steps by govt and RBI, if implemented well, will improve business environment in long ter

Even as India was looking to it for a rating upgrade, Moody’s Investors Service on Monday restricted its talks to the outlook on the economy’s grade, at the lowest investment level at present.

In its annual credit analysis on India, the rating agency said the recent measures by the government and the Reserve Bank of India (RBI) to address various weaknesses in the economy seemed modest but these, if implemented effectively and supported by other structural reform steps, could go a long way in mproving India’s business environment.

It said the outlook for India’s rating would improve if fiscal, inflation and infrastructure metrics improved and moved closer to median scores of similarly rated economies.

“On the other hand, the outlook would weaken with a further deterioration in the fiscal position, or rising contingent liabilities from the state-owned banking sector, or a material decline in foreign exchange reserves coverage of external debt and imports,” it said.

Moody’s, besides other agencies like Fitch and Standard & Poor’s, has assigned India the lowest investment grade with a stable outlook. India, however, maintains its rating should be upgraded. Moody’s clarified its annual credit analysis should not be taken as a rating action.

Pointing out that India’s low per capita incomes limited the tax revenue base and inflation was still higher than in similarly rated economies, Moody’s said the recent measures might appear modest in their near-term impact but could enhance India’s operating environment and improve competitiveness.  But these had to be effectively implemented and augmented with additional structural reforms.

RBI has been refusing to lower policy rates because of upside risks to inflation, while the government has liberalised foreign direct investment norms for the railway infrastructure, defence and construction sectors, to revive investment cycle and boost growth.

Some other measures, such as a Bill to increase foreign investment in insurance, the Constitution amendment Bill to implement goods & services tax, the land acquisition Bill and amendments to the companies law, are expected to be tabled in the current session of Parliament if the current logjam in the House eases.

Pointing out that India’s high economic strength was a key source of sovereign credit support, Moody’s said gross domestic product growth, savings and investment rates exceeded comparable emerging-market averages.

Though growth slowed significantly between 2011 and 2014, Moody’s expected it to accelerate from between five and six per cent over next year to above seven per cent thereafter. The growth projections are, however, subject to benign global economic and financial conditions and effective implementation of the government’s macroeconomic and structural reform agenda.

The country’s annual growth, after slipping to under five per cent in 2012-13 and 2013-14, recovered to 5.5 per cent in the first half of the current financial year, in line with the government’s expectations of 5.4-5.9 per cent expansion in 2014-15.