India’s GVA growth to increase to 7.7% this fiscal: Moody’s

Global rating agency Moody's Investors Service has projected that India’s gross value added (GVA) growth will rise to 7.7% this fiscal with mixed trend in inflation, listing budget targets, private investment and bank liabilities as the main challenges for India. It also said that it could upgrade India's rating in one-two years if it is convinced that reforms are ‘tangible’, though it called the reform process slow and gradual with muted private investment and non performing assets (NPAs) posing a challenge. Further, it said that in the nearer term, challenging budget targets could lead to significant spending cuts late in the fiscal, especially since in the first four months of the fiscal year, 74% of the whole year’s budget target has already been reached.

Moody’s further said that with India’s credit rating materializing in the medium term based on reforms, it could potentially stabilize the macro-economic environment that is conducive to fiscal consolidation. According to the report some measures, if effectively implemented it can push India’s growth, notably an easing of restrictions on foreign direct investment to foster productivity, bankruptcy law for enhancing investor confidence and measures aimed at ease of doing business. However, these reforms will ease rather than remove some of the hurdles to robust and sustained investment along with the growth in India. In the nearer term, private investment will remain weak as corporate in investment-intensive sectors are burdened by elevated debt.

About the shift to a pan-India goods and service tax regime, Moody’s said this will only enhance revenue collection for the government over time, through better tax compliance and higher profits, as businesses save on tax administration costs. It said that banking sector risk will also remain a constraint on India’s sovereign ratings. While bad asset recognition is a first step, the measure does not strengthen the resilience of banks, and therefore does not reduce the contingent liability risks for the sovereign. It also estimated that fiscal costs of equity injections in public sector banks are manageable, although they are larger than currently budgeted and will add to the government’s challenge in meeting its fiscal targets.

The rating agency termed passage of GST and the bankruptcy law, the move towards the fiscal deficit range and inflation-targeting monetary policy as "credit positive". Moody's, has a 'Baa3' rating with a positive outlook on India. It had in April 2015 revised India's outlook to positive from stable and said it could upgrade rating in 12-18 months.