India's growth over the coming years will be challenged by lacklustre global demand, high corporate leverage and impaired credit supply, Moody's Investors Service today said.
The passage of land acquisition and Goods and Services Tax (GST) Bill has stalled, which illustrates that "political friction will keep the reform process uneven and slow-moving," it said.
"Domestic political developments amid an uncertain global environment in 2016 are likely to keep the market sentiment volatile," Moody's said in 'Inside India' report.
It however expects India's medium-term potential to be supported by the gradual implementation of further targeted policy reforms, improving the business environment, state of infrastructure and productivity growth.
Moody's said passage of bankruptcy law and NPA recognition in banks would be credit positive, if it leads to improved bank capitalisation levels, renewed loan growth and robust risk processes.
"Growth will be adversely affected by high leverage of some large corporates that will also weigh on credit demand, while impaired assets in the banking system will negatively affect credit supply," Moody's Senior VP and Manager Marie Diron said.
Moody's said lower nominal growth affects government revenues, suggesting that the government will have to rein in spending to meet its deficit target.
"This will leave little room for fiscal measures to support investment or offset potential negative external or domestic shocks, which continue to pose downside risks to our forecast of around 7.5 per cent real GDP growth in the next two years," it added.
It said Britain's exit from the European Union would have only "limited impact" on India's financial markets as exports to the UK and the rest of the European Union account for 0.4 per cent and 1.7 per cent of the GDP respectively.
"India is not significantly exposed to a potential sharp fall in capital flows to emerging markets," it said, adding only a very large and prolonged slump in imports from these regions would markedly dent India's exports.
Moody's expects macroeconomic policies to contribute to sustained robust growth, and thereby allow for gradual fiscal consolidation.
The US-based agency has a 'Baa3' rating on India with a positive outlook.
