Moody's says India less exposed to external factors, pegs GDP growth at 7.5% in 2016

The ratings agency pointed out that the implementation of seventh pay commission will boost consumption growth

Global ratings agency Moody’s Investors Service estimates India’s economic growth at 7.5 per cent in both 2016 and 2017. Unlike China, it says, this country is less exposed to external headwinds and would benefit from lower commodity prices.

The economy grew 7.5 per cent in the first nine months of FY16. So, Moody’s does not expect higher expansion. It also said an otherwise robust economic environment faces hurdles in the form of banks’ balance sheet repair and high corporate debt.

“India is relatively less exposed to external factors. Instead, the economic outlook will be primarily determined by domestic factors,” it said in a report issued on Thursday.

“The 23.55 per cent increase in public sector salaries proposed by the 7th Pay Commission is worth 0.7 per cent of gross domestic product (GDP). It is not yet known how this proposal will be implemented but higher public sector wages will most likely contribute to strong consumption growth,” it said. Moody’s rating for India sovereign debt is Baa3, the lowest investment grade.

The ratings agency added the pay increase will also probably raise inflationary pressure. “However, we assume the government will cut spending to maintain the deficit in line with the 3.5 per cent of GDP objective, thereby mitigating some of the inflationary effects.”

In its report, Global Macro Outlook 2016-17: Global growth faces rising risks at time of policy constraint, it cautions that a robust economic environment is constrained by “banks’ balance sheet repair and elevated corporate debt” and “corporate pricing power being limited by the impact on food price inflation and households’ budgets of consecutive droughts”.

Gross non-performing assets of public sector banks crossed Rs 4.04 lakh crore by December-end 2015, a rise of 450 per cent since March 2011.

Moody’s said global growth would fail to pick up steam over the next two years, as a slowdown in China, lower commodity prices and tighter financing in some countries weigh on economies.

India’s economy, it said, was powered by sustained growth in consumer spending, fostered by moderate inflation and still favourable demographics, and strengthening investment, in foreign direct investment.