Moody's detects long-term problems for India's economy

Says structural issues account for half of economic deceleration

Even as the policy makers hope for early economic recovery, Moody's Investors Service today attributed half of the country's slowdown to structural problems. This indicated that even if cyclical measures improve due to better global environment, India needs to address its structural problems to witness any significant recovery. 

"...almost half of India's slowdown was due to structural factors," Moody's said in its latest report, titled 2014 Outlook - Global Sovereigns: Credit Quality Stabilizing After Several Tumultuous Years".

Citing an example, the rating agency said despite high levels of savings, the infrastructure remains subject to funding shortage.

Saving rate in India is projected to grow to 31% of GDP in 2013-14 from 30.2% in 2012-13. Though it would be lower than even 32% witnessed in the global financial crisis of 2008-09, the rate is nonetheless not abysmally low. Despite that India is struggling to get financing for infrastructure projects.

The Planning Commission's target of $500 billion funding in infrastructure in 11th five-year plan (2007-08 to 2011-12) could not be achieved. The target for 12th five year plan (2012-13 to 2016-17) is $1 trillion.

India's economic growth fell to a ten-year bottom of 5% in 2012-13. While the government looked for green shoots of recovery for 2013-14, the growth crashed to a four-year low of 4.4% in the first quarter of the year. The second quarter is also set to deliver sub-5% growth.

The structural issues become important when one compares India's problems to other countries. Moody's report revealed that both India and Russia saw moderation in economic growth by 3.1-3.2% during 2011-13, strcutural problems accounted for just 16% of slowdown in the latter's economy.

On the other hand, China's slowdown due to structural factors was about 60%. "This reflects the maturing and ageing Chinese economy, following 32 years of stellar growth (averageing 9.5% annually) and the tampering of investment-led growth," said the report.

The slowdown and rebalancing in China creates the potential for shocks across emerging as well as advanced countries. These shocks are driven not only by the effects of growth reduction, which are likely to be felt more acutely in China's and India's merging neighbourhood in Asia, but also by the effects of rebalancing in demand for commodities.

At the world level, Moody's said after several tumultuous years, global sovereign creditworthiness is likely to be comparatively stable in 2014.

"Nearly three quarters (85 out of 124) of Moody’s-rated sovereigns now carry stable rating outlooks, compared with fewer than two thirds (77/120) at the start of 2013," the report said.

India carried the lowest investment grade -- Baa3. While, its peers Fitch and Standard and Poor's also assign the lowest investment grade to India, Moody's has given the economy a stable outlook. Fitch had also reverted to stable outlook after downgrading it to negative, while S&P has a negative outlook on India's ratings.