The slow pace of reforms and deficient monsoon could mar India’s growth prospects. Sounding an alarm bell, international rating agency Moody’s has downgraded India’s growth forecast for the current fiscal to 7% from 7.5% projected earlier. For 2016-17, the Moody’s has retained growth forecast at 7.5%.
“We have revised our GDP growth forecast down to around 7% in light of a drier-than-average monsoon although rainfall was not as low as feared at the start of the season,”
– Moody’s Investors Service said in its ‘Global Macro Outlook for 2015-16’.
Despite the downgrade that is at variance with International Monetary Fund (IMF) forecast, Moody’s feels that pace of reform must pick up for growth momentum to be sustained. The rating agency was obviously mindful of the fact that the entire monsoon session of parliament ended without transacting any business and the Government failed to pass key legislation like Goods and Services tax Bill. The IMF has predicted that India’s GDP will grow up to 7.5% in 2015-16.
“One main risk to our forecast is the pace of reforms slows significantly as consensus behind the need for reforms weakens once the least controversial aspects of the government’s plan have been implemented,” Moody’s said.
The Moody’s downgrade will come as a dampener for India’s policy makers. The Finance Ministry and Reserve Bank of India have projected the country’s GDP to grow by 8-8.5% and 7.6% respectively for the current fiscal.
Despite the downgrade, the Moody’s has ranked India as one of the fastest growing economies. “ We reiterate that at 7%, we are forecasting India to be among the fastest-growing large emerging markets this year. And we expect growth to accelerate by next year.”
According to the Moody’s India will keep its date with the RBI forecast of below 6% inflation target by year end. “Barring a large shock to commodity prices or food inflation, we think that the central bank’s inflation targets are achievable,” Moody’s said.
Moody’s counting on falling commodities prices to benefit India in a big way and was hopeful that the country’s economy was moving in the right direction and lowering of inflation will help boost consumer demand, which in turn will spur growth. “Maintaining inflation at lower levels than in the past will support real incomes and spending. As long as the central bank’s objective is credible, it will also foster investment by providing more visibility about future revenue growth and margins,” it said.
Incidentally, both wholesale and retail inflation have declined sharply during the past few months. While retail inflation stood at 3.78%, the Wholesale Price inflation was at (-)4.05% in July.
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