Interest rates may climb, says Moody's

India faces the risk of a further rise in interest rates. The upward pressure on interest rates could strengthen as authorities move to address the investment shortfall, including through private-public partnerships, when happening simultaneously with a similar investment revival by industry, said global ratings agency Moody's Investors Service in its analysis of the Indian economy.

The reversal of the lower interest rate regime that helped ease fiscal pressures in the past few years is seen as a more worrying factor by Moody's. It said sizeable government borrowing requirements amidst strong growth and rising private investment have already led to higher domestic interest rates.

The beginning of firming up of interest rates raises fresh concerns about crowding out in the local financial markets that are the principal source of funding for government deficits, the rating agency said.

Most measures of poverty and income, while improved, rank India among the lowest in the world. In spite of its impressive growth performance on average over the past decade, still faster growth would likely help to create more jobs and to lift more of the population out of extreme poverty, particularly if the social and physical infrastructure were improved.

The unhealthy state of public finances, with little maneuverability to spend in these areas because of onerous debt servicing requirements and other inflexible mandates, represents a serious constraint on growth and development. The relatively weak investment rate also stifles growth, Moody's said.

Total investment in India has risen, even as government investment has contracted, but gross capital formation stands at just 26 per cent of GDP.

Similarly, although net FDI picked up to $2.2 billion in the first three quarters of 2004-05, this translates into just 0.6 per cent of GDP. The flood of portfolio and equity capital into India in the past five years has not spilled over into sufficiently higher investment.

China "� the obvious comparison even if just in terms of population "� spends 40 per cent of GDP on investment, mobilises triple the amount of FDI in relative terms, and posts GDP growth of 9 to 10 per cent or more on a regular basis.