 "High corporate leverage to hit growth: Moody’s")
Moody's on Tuesday said India's economic growth over the next two years would face challenges from lacklustre global demand and high leverage in some corporate sectors.
“Growth will be adversely affected by high leverage of some large corporates also weighing on credit demand, while impaired assets in the banking system negatively affect credit supply,” said Marie Diron, a Moody's senior vice-president and manager.
By contrast, India's medium-term potential would be supported by the gradual implementation of targeted policy reforms. These would improve the business environment, state of infrastructure and productivity growth. Continued high corporate leverage, low nominal domestic growth and lack of corporate pricing power would hold back investment activity for at least several quarters, it said. At the same time, poor asset quality and weak capitalisation restrict the lending capacity of public sector banks, which account for about 70 per cent of the banking system assets. Despite an accommodative monetary policy stance, growth in domestic fixed asset investment was expected to remain lacklustre, Moody’s added.
The analysis were part of the latest edition of Inside India, a quarterly publication that looks at major credit trends in India.
In the near term, India’s growth challenges reflects factors that pre-date the UK referendum. First, it said, lacklustre global demand constrain exports, which account for around 20 per cent of GDP. Second, two years of drought have dampened consumption, with weak rural incomes and higher food inflation lowering purchasing power. Lastly, high leverage for some large corporates weighs on credit demand while impaired assets in the banking system negatively affect credit supply.
Corporate deleveraging might take time as cash flows are impacted by weak global demand.
The government’s policy response would have mixed results. Imposition of minimum import prices for steel, for example, would be mildly positive for the sector. By contrast, expensive telecom auctions in 2016 would contribute to a further increase in leverage in the telecom sector, which was yet to digest last year’s auction outcome, it added.
“Growth will be adversely affected by high leverage of some large corporates also weighing on credit demand, while impaired assets in the banking system negatively affect credit supply,” said Marie Diron, a Moody's senior vice-president and manager.
By contrast, India's medium-term potential would be supported by the gradual implementation of targeted policy reforms. These would improve the business environment, state of infrastructure and productivity growth. Continued high corporate leverage, low nominal domestic growth and lack of corporate pricing power would hold back investment activity for at least several quarters, it said. At the same time, poor asset quality and weak capitalisation restrict the lending capacity of public sector banks, which account for about 70 per cent of the banking system assets. Despite an accommodative monetary policy stance, growth in domestic fixed asset investment was expected to remain lacklustre, Moody’s added.
The analysis were part of the latest edition of Inside India, a quarterly publication that looks at major credit trends in India.
In the near term, India’s growth challenges reflects factors that pre-date the UK referendum. First, it said, lacklustre global demand constrain exports, which account for around 20 per cent of GDP. Second, two years of drought have dampened consumption, with weak rural incomes and higher food inflation lowering purchasing power. Lastly, high leverage for some large corporates weighs on credit demand while impaired assets in the banking system negatively affect credit supply.
Corporate deleveraging might take time as cash flows are impacted by weak global demand.
The government’s policy response would have mixed results. Imposition of minimum import prices for steel, for example, would be mildly positive for the sector. By contrast, expensive telecom auctions in 2016 would contribute to a further increase in leverage in the telecom sector, which was yet to digest last year’s auction outcome, it added.
