Moody's says 9% growth unsustainable: <b>Video</b>

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International rating agency Moody's Investors Service today said that India may not be able to sustain a growth rate of 9% due to capacity constraints amid signs of overheating in the economy.

"Above potential growth is expected to continue for another year or so, but it is unlikely to continue beyond that point owing to capacity constraints," according to Kristin Lindow, vice president & senior credit officer, Sovereign Risk Unit, Moody's Investors Service.

Moody's expects India's growth rate would be able to stay above its 6.5% long-run potential for the next year or two, mainly due to on-going availability of external liquidity to finance the growing current acount deficit.

Factors such as infrastructure shortages and shortage of skilled labour will begin to rein in India's growth rate, whether triggered by changed external circumstances or the build-up of domestic pressures, the agency noted in its annual report on India.

"There are a lot of signs of overheating of the economy such as consumer credit and inflation, growth in consumer imports, widening current account deficit and speculative capital flows into equities," Kristin said.

Inflation may be below the Reserve Bank of India's comfort zone of 5-5.5% to accomodate fast growth in the context of increasingly binding capacity constraints.

"The monetary policy has been tightening gradually over the last two years. However, global liquidity (ample portfolio and other capital inflows) is in India's favour as a result, policy tools are little less effective than they would be," said Kristin.

Moody's noted in its report that any easing in the targets under the FRBM Act, as being debated by policy makers to meet infrastrucuture shortfalls, would signal undue complacency about the government's large debt and debt service burden, potentially exacerbating the overheating economy and spurring higher inflation and interest rates.

According to the agency, there is need to focus on rationalising government spending and not only take advantage of revenue windfalls in reducing fiscal deficit.

Heavy public debt has constrained India's domestic currency rating to speculative grade Ba2, even as a healthy external position is reflected in its investment grade Baa3 foreign currency rating, Moody's said.