 "Growth forecast to not have an impact on India's credit rating as of now: Atsi Sheth")
Moody's Investors Service senior vice-president Atsi Sheth tells Indivjal Dhasmana that the rating agency has revised down India's economic growth projections for 2015-16 due to expected impact of monsoon on rural parts, trends seen from Purchasing Managers' Index (PMI), the Index of Industrial Production (IIP) and bank credit growth and external conditions. She says agency's rating takes longer term view of growth than one year of forecast. India has a lowest investment rating with positive outlook from Moody's. Edited excerpts:
Why has Moody's so drastically cut India's economic growth forecasts, lower than even 2014-15 growth rate just on monsoon deficiency which anyway is not as grave as was initially projected ?
We have adjusted our GDP growth forecast for India from about seven and a half to seven percent to reflect three factors. First, the trends we see in high frequency economic indicators such as PMI and IIP, as well as trends in bank credit growth. These data show that economic recovery is ongoing, but it is rather slow. Second, our GDP forecast reflects our view that although this year’s monsoon is less weak than was originally anticipated, its performance was such that a significant boost to rural incomes (and hence rural consumption) is unlikely in the near term, limiting an important driver of growth in India. Thirdly, given generally subdued global growth and some amount of financial market uncertainty, external conditions have also not provided a boost to India’s growth.
Would this assessment of Moody's have any impact on India's credit ratings ?
Our ratings take a longer term, ie three to five year view. Therefore, an upward or downward adjustment in one year’s forecast does not generally shift our assessment of a sovereign credit profile. We currently have a positive outlook on India’s sovereign credit rating, which was based on our view that India’s growth will continue to outperform peers, and that Indian authorities are putting in place a policy framework to address India’s fiscal, inflation, regulatory and infrastructure challenges. These drivers of the outlook are still in place, in our view.
Will we be correct in assessing that Moody's is pessimist so far as India's growth is concerned as none other agency has projected the country's economic expansion this year to be lower than last year's ?
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We adjust our forecasts to reflect our view on what recent data and other developments are telling us about growth trends. But note that whether India grows at 7% or 7.5% this year, it will be among the fastest growing large economies in the world. In fact, as we’ve said before, India has outperformed peers in terms of growth over the last decade, and is likely to do so over the next several years. In our view, India’s growth potential is a significant sovereign credit strength. Moreover, we look at economic growth not just in terms of GDP, but also in terms whether the sources of growth are diverse and whether savings and investment levels are high. On all these parameters, India performs well relative to global peers.
Could this growth be further revised down with legislative reforms lying hostage to Parliament logjam ?
The current forecast takes into account recent policy developments, as well as our policy expectations for the coming year. We have long held that large-scale reforms are difficult to implement in India, given its political process. Therefore, the slow pace of progress on those policies that need parliamentary approval do not come as a surprise to us. We hold the view that an improvement in India’s operating environment is still possible, even if some policy change is slow. For instance, there have been measures announced with respect to public sector banks, there is greater transparency around the inflation targeting regime and there has been some liberalization in foreign investment rules. All of these are positive from the sovereign credit perspective. The impact of these reforms on growth, however, will be apparent only over a three to five yea
r horizon, not this year.
How do you assess India's growth rate in comparison to China's and global economies'?
As I mentioned earlier, we see India as one of the fastest growing large economies in the world. In the near term, relative to peers that are commodity producers or have export driven economies, India benefits from lower oil prices, and a relatively low reliance on net exports to drive growth. It is also less reliant on foreign financing for growth than some other peers—which benefits its growth outlook at a time when global financial conditions are uncertain. Another positive macro-economic trend that we see in India is that there has been fiscal and monetary tightening in past years, which has helped lower inflation. This policy tightening can subdue growth in the near term, but greater macro-economic balance in terms of inflation, fiscal and current account metrics make growth more sustainable in the medium term.
Your report did say about RBI's boosting investment by providing more visibility about future revenue growth and margins. Does this mean you expect RBI to cut the policy rate in the next review or even before that ?
The RBI has eased policy since the beginning of this year. But growth recovery has yet to accelerate significantly. Whether the RBI will continue with easing this year will depend on how the central bank views the implications of global financial volatility, and the prospects for inflation over the coming months, particularly food inflation. There is currently some uncertainty around these factors, so it is difficult to say what or when the next monetary policy move will be.