India's growth may slow down to 6.5%: Moody's

Moody's Investors Service warned that India's economic growth was not expected to continue at the scorching pace set in 2003-04. "We anticipate that annual growth will average a still respectable 6.5 per cent in the years ahead," Kristin Lindow, Moody's lead sovereign analyst for India, said in an agency's report, India: Global Credit Research.

"Even at 'just' 6.5 per cent, India is likely to attract much more capital going forward than has been the case historically," said Lindow, who nevertheless cautioned that growth and its positive effects would be difficult to maintain in the absence of an increased investment in human and physical infrastructure and a fiscal adjustment that would leave more room for private investment to expand.

"The willingness of politicians to correct the worsening fiscal situation has traditionally been lacking," she said. Moody's, however, saw an opportunity for a fresh reform commitment after the general elections.

The agency's annual report on India also said the country's Baa3 foreign currency ceiling for debt and stable outlook reflected strong external liquidity and a vibrant growth outlook. "The country's external financial position is consistent with or even stronger than its Baa peers," Lindow said.

The recent economic buoyancy has been attributable to last year's dramatic farm sector recovery, after an excellent monsoon, as well as continued healthy output gains in the services and industrial sectors. India posted gross domestic product (GDP) growth rates of 5.7 per cent, 8.4 per cent and 10.4 per cent in the first three quarters of 2003-04.

"Moody's expects that the next administration will be favourably disposed to additional economic adjustments, to the extent that reforms are given credit for recent economic buoyancy. Hopefully, this will include more aggressive fiscal tightening," Lindow said

The weak fiscal situation -- including a consolidated gross debt of the central and state governments that has grown to around 85 per cent of GDP due to persistent double-digit financial deficits -- is the primary reason why the government's domestic currency rating is Ba2, two notches below the foreign currency rating.

The domestic currency rating also carries a negative outlook. The ceiling for foreign currency bank deposits is also Ba2, although with a stable outlook, reflecting ample financial system foreign assets.

On the external side, workers remittances and software and other services exports are expected to offset robust import demand and keep the current account in rough balance over the next two years.

With high oil prices and substantial import growth, the current account surplus might revert to a modest deficit of up to 1 per cent of GDP in 2004-05, but this would be more than fully financeable.

India's balance of payments also enjoyed protection from controls on capital movements, which was reinforced by improving investment prospects, the report said.

Still, the government's large reserve cushion was providing increasing room for a gradual easing of foreign borrowing restrictions and other capital market controls, it added.