Gradual reforms to support India's growth outlook: Moody's

Cautions that risks to banking sector remain

Global Rating agency Moody's on Monday said India's (Baa3 positive) credit profile is supported by the strong growth potential of its economy and the high private savings rate. 

The higher savings rate underpins the government's access to domestic financing at relatively favourable terms.

These credit strengths are balanced against number of factors including a high government debt burden – 67.4% of GDP in 2015 – regulatory and infrastructure constraints on its competitiveness, and slow pace of policy reform, Moody's said in a statement.

This commentary comes close on heels of appointment of Urjit Patel as next Governor of Reserve Bank of India to succeed Raghuram Rajan.

The contingent liability risk to the sovereign from public sector banks' high and rising non-performing loans also has bearing on profile.

Moody's has just released annual credit analysis of Government of India -- Baa3 Positive. 

Over the past year, external developments like lower global oil prices  have been favourable to India. The country also adopted tighter or less accommodative fiscal and monetary policies than in the past.  This has helped the economy to be a more stable macroeconomic development with smaller fiscal deficits, lower inflation and a narrower current account deficit.

However, one short-term consequence of the policy setting, combined with two successive unfavourable monsoons last year and the year before, has been relatively moderate nominal GDP growth. 

"We expect corporates' profitability to remain muted which will continue to dampen their ability and willingness to invest in the next few quarters", Moody's said.

India's real economic growth is expected at around 7.5% in the next two years. In nominal terms, we do not expect GDP growth to rise above 10% until FY2017.

Over time, sustained fiscal consolidation, stable inflation at moderate levels and progress on reforms to enhance 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, benefits are expected to be very gradual.

Institutional strength is apparent in India's entrenched system of checks and balances among branches of the government. 

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.