Moody's affirms India's rating with positive outlook

Moody's Investors Service today affirmed India's sovereign rating at 'Baa3' with a positive outlook, saying it expects policymakers to continue reforms to achieve balanced growth and reduce the government's debt load.
India had pitched hard with Moody's for a rating upgrade, but the US-based agency has maintained that it would wait for "tangible" benefits of reform initiatives before upgrading its sovereign rating.
"The policy effort has not delivered a sufficiently clear prospect of the reform dividends -- sustained, high growth and the promise of a reduction in the country's debt burden -- to support an upgrade," Moody's said as it affirmed India's 'Baa3' ratings while maintaining a 'positive' outlook.

The positive outlook denotes Moody's expectation that, over time, India's credit metrics will likely shift to levels consistent with a 'Baa2' rating.
"In particular, the outlook reflects our expectation that continued policy reform implementation will allow balanced growth to support a reduction in the government debt burden, currently a constraint on India's rating," it said.
Baa3 rating implies lowest investment grade -- just a notch above 'junk' status.

A broad range of policies have been implemented that are conducive to moderating inflation and limited current account deficits. A number of policy reforms, if effective, would lead to higher investment and more efficient savings, Moody's said.

The passage and ongoing implementation of a range of economic reform measures, including the goods and services tax and reform of the bankruptcy code, points to improvements in government effectiveness, it added.
"Policy reforms are still relatively recent with material uncertainty about the effectiveness of measures already implemented and whether momentum will sustain," Moody's said.
However, private investment has not picked up in response to the government's measures, denoting limited policy effectiveness.
Its assessment is investment has been constrained by high leverage in some sectors, a relatively unfavourable global environment and in some cases, limited access to finance. Businesses may have to wait for more certainty about the tangible implications of reforms on their operating environment.

The coordination and alignment of objectives between different parts of the government and the private sector poses implementation challenges, it added.
The sovereign rating and outlook for a country are often referred to as key parameters by foreign investors and global bodies to gauge its investment climate.
US-based Moody's Indian affiliate ICRA said that India
will remain one of the fastest growing major economies globally in 2017, although GDP growth will moderate in the first half of the year, as the economy adjusts after demonetisation.
The agency expects the growth of gross value added (GVA) at basic prices to remain healthy in 2017, although such growth will ease somewhat to about 6.6 per cent from around 7 per cent in 2016, with a likely pick-up in second half of 2017.

"Even after the currency in circulation is replenished, we expect that India's economic growth will stabilise with a lag, while remaining strong. The adjustment and recovery period could stretch to as much as 2-3 quarters for certain sectors," ICRA Principal Economist Aditi Nayar said.
It said the focus on digital transactions and the introduction of a goods and services tax (GST) will likely reduce the competitiveness of the unorganised sector.
ICRA said it therefore anticipates a relatively healthier expansion of the organised sectors in 2017, at the cost of the unorganised sectors.
It pointed out further that the low agricultural growth in H1 2016, as well as healthy reservoir levels on a seasonally adjusted basis, will support the pace of expansion of agricultural output in the first half of 2017.

The loss of incomes in some sectors and deferral of consumption are likely to weigh on capacity utilisation, delaying the capacity expansion plans of the private sector.
On the issue of average CPI inflation, ICRA said the rate will soften to 4.5 per cent in 2017 from 4.9 per cent in 2016. Key factors that will dominate CPI inflation in 2017 include monsoon dynamics, the impact of the GST on prices of various goods and services, commodity price movements, and the INR-USD exchange rate.