Reforms to boost growth; banking sector risks remain: Moody's

Moody’s Investors Service on Monday said continued reforms to enhance business environment and moderate inflation would help India achieve robust growth but cautioned that rising contingent liability risks in the banking sector could affect its credit quality. 

Evidence of success in policymakers’ efforts to introduce growth-enhancing economic and institutional reforms would provide support for a rating upgrade, Moody's said in its Annual Credit Analysis as it forecast GDP growth at 7.5 per cent for the next two years.

“Sustained fiscal consolidation, stable inflation at moderate levels and progress on reforms aimed at enhancing the business environment would contribute to sustained growth at robust levels. In turn, persistent income and profit growth would raise government revenues and contribute to improved fiscal metrics. However, we expect the benefits to be very gradual,” Moody’s said. 

India’s credit profile is supported by strong growth potential and high private savings rate, it said. 

“Conversely, signs of slippage in progress towards those goals or indications of rising contingent liability risks related to the banking sector could weigh on India’s credit quality,” Moody’s added. 

India’s strengths are balanced against a high government debt burden (67.4 per cent of GDP in 2015), regulatory and infrastructure constraints on its competitiveness, slow pace of policy reform, and the contingent liability risk to the sovereign from public sector banks’ high and rising non-performing loans. 

“Looking ahead, evidence of success in policymakers’ efforts to introduce growth-enhancing and growth-stabilising economic and institutional reforms would provide support for a rating upgrade,” it said. 

Moody’s further said institutional strength was apparent in robust democratic apparatus. Offsetting weaknesses include an uncertain regulatory environment, corruption, a slow-moving judicial system and, in general, inefficiencies in the delivery of government services, it added. 

“At the current juncture, political fragmentation leads to slow and ad-hoc progress on reforms. Progress on land and labour reforms, when it has occurred, has been limited and gradual,” it said. 

Moody’s said the positive outlook on India’s rating reflects expectation that policies over the next 12-18 months would support sustained growth, accompanied by narrower fiscal deficits, low current account deficits, increased savings and investment, and inflation that is within the central bank’s target. 

Over the past year, it said external developments favourable to India such as lower global oil prices have combined with policy measures to move the economy towards a more stable macroeconomic development with smaller fiscal deficits, lower inflation, and a narrower current account deficit.