Disappointment creeping in over Modi govt’s reform pace: Moody’s

Tribune News Service

New Delhi, June 30

Global credit rating agency, Moody’s has pointed to “some disappointment” with the pace of economic reforms under Prime Minister Narendra Modi and flagged increasing concerns over policy stagnation.

Moody’s has also raised concerns over the weakened rural economy which will continue to be subdued and in turn weigh on private consumption and non-performing assets (NPAs).

The Moody’s analysis is part of a report called ‘Inside India’, which also includes key takeaways from a number of audience polls carried out during the first annual Moody’s and ICRA India Credit Conference in Mumbai.

Moody’s said while growth expectations are optimistic, its polling results pointed to some disappointment among the audience with regard to the pace of reforms under the administration of Prime Minister Narendra Modi, and increasing concerns about the risk of policy stagnation.

It goes on to add that specifically, almost half of the respondents identified sluggish reform momentum as the greatest risk to India’s macroeconomic story.

The agency also pointed out that the reforms being initiated now will take years for their effect to be visible. “Moody’s notes that the multi-party, federal democracy in India underpins a gradual pace of policy implementation. While many of the policies are positive for India’s institutional strength, the direct impact of growth-enhancing reforms is only likely to take full effect over a multi-year horizon”, it said.

It cited the example of the plans to cut the country’s corporate tax rate to 25% from the existing 30% over the next four years will be credit positive for all Indian corporates insofar as it will reduce their tax expenses and increase their competitiveness over the medium term.

In April, Moody’s had upgraded India’s sovereign ratings outlook to positive from stable on the grounds that the government was creating conditions for the improvement of the country’s macro-economic profile and India will outperform its peers in growth terms.

Moody’s Investors Service expects India’s weakened rural economy to remain subdued through the fiscal year ending March 2016 (FY2016), particularly if the risk of below-average monsoon rainfall materialises.

“A sustained soft patch for India’s rural economy would weigh on private consumption and non-performing assets in the agricultural sector, a credit negative for the sovereign and banks,” says Rahul Ghosh, Moody’s vice-president and senior research analyst.

Rural income growth in India has been stuck in the mid-to-low single digits in 2015 to date, well off the 20%-plus rates clocked in 2011.

The slower rural income growth is partly the result of increased fiscal restraint by the Central Government, which, Moody’s believes is unlikely to change in the coming quarters.

Moody’s said the consensus view on India’s economic growth prospects is relatively optimistic, very much in keeping with Moody’s baseline scenario of headline economic expansion of 7.5% in FY16. This forecast represents the highest projection among G20 economies, and provides a key pillar of support for the Baa3 sovereign rating and positive outlook.