India's GDP growth to be in grip of weak global demand: Moody's Investors Service

It said India's medium-term potential will, however, be supported by gradual implementation of further policy reforms

India's GDP growth over the next two years will be challenged by lacklustre global demand and high leverage in some corporate sectors, Moody's Investors Service said on Tuesday.

"The growth will be adversely affected by high leverage of some large corporates also weighs on credit demand, while impaired assets in the banking system negatively affect credit supply," Moody's Senior Vice-President Marie Diron said in the report.

Moody's said India's medium-term potential will, however, be supported by gradual implementation of further policy reforms, thereby improving the business environment, state of infrastructure and productivity growth.

On whether Britain's majority vote last month to leave the European Union will affect India's financial markets, the American rating agency said effects will be limited, as exports to the UK and the rest of the European Union account for 0.4% and 1.7% of India's Gross Domestic Product respectively.

Moreover, India is not significantly exposed to a potential sharp fall in capital flows to emerging markets, the statement added.

"First, the lacklustre global demand constraints exports, which account for around 20% of the GDP. Second, two years of drought have dampened consumption, with weak rural incomes and higher food inflation lowering purchasing power," the report said.

"Lastly, high leverage for some large corporates weighs on credit demand while impaired assets in the banking system negatively affect credit supply," it added.

Last month, Moody's said that in view of the heavy losses reflected in their balance sheets in the last fiscal, Indian state-run banks will require a capital infusion of Rs 1.2 lakh crore by 2020, an amount far higher than the additional Rs 45,000 crore capital infusion planned by the government by the 2018-19 fiscal.

Public sector banks suffered losses of Rs 18,000 crore in 2015-16 because of high non-performing assets or bad loans.

Moody's said continued high corporate leverage, low nominal domestic growth and lack of corporate pricing power, will hold back investment activity in India for at least several quarters.

The US firm, which currently rates India Baa3 positive, said although Parliament has passed some credit positive measures regarding bankruptcy and foreign investment, "the passage of laws related to land acquisition and the goods and services tax have stalled, illustrating our expectation that political friction will keep the reform process uneven and slow-moving."

"Domestic political developments amid an uncertain global environment in 2016 are likely to keep market sentiment volatile."