New Delhi, June 30, 2015
Portions of this blog have been reproduced from Moody’s Quarterly report, June 30, 2015.
- Short term concern, long-term upbeat
- Some disappointment over the pace of reforms
- Rural income growth is slower partly due to increased fiscal restraint by the Government
Moody’s Investors Service has cautioned that subdued rural economy could be a ‘credit negative’ for India’s sovereign rating in the wake of concerns over policy stagnation and “some disappointment” over the pace of reforms under the Modi government. But despite flagging these worries in its latest ‘Inside India’ report, Moody’s is upbeat about India’s economic growth prospects and has kept intact its baseline forecast of 7.5 percent GDP growth in current fiscal.
Moody’s 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 materializes.
“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.”
– 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 quarterly analysis that looks at major credit trends in India 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, which took place in May.
According to the poll results, 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 FY2016. This forecast represents the highest projection amongst G20 economies, and provides a key pillar of support for the Baa3 sovereign rating and positive outlook.
“Notwithstanding these growth expectations, our polling results pointed to some disappointment amongst the audience with regard to the pace of reform under the administration of Prime Minister Narendra Modi, and increasing concerns about the risk of policy stagnation. Specifically, almost half of the poll respondents identified sluggish reform momentum as the greatest risk to India’s macroeconomic story.”
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.
For instance, 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.
Referring to the outcome of the joint polls conducted along with ICRA in May, Moody’s said nearly half of the respondents felt that that sluggish reform momentum represents the greatest risk to India’s macroeconomic story going forward.
However, Moody’s said that the positive impact of the recent policy changes will take time to play out over several years.
“Policies including the ‘Make in India’ campaign, increased Foreign Direct Investment limits in rail infrastructure, Defense and Insurance, and bills related to mining will all improve India’s growth outlook,” it said, adding, “The government’s recent policy agenda, including diesel price deregulation, lifting of the iron ore mining ban, the Coal Mines Special Provisions Bill and the Mines and Minerals development and Regulation Bill, will benefit refining, metals, steel and power companies.
“Other sectors have yet to see a specific boost from government policies under the Modi administration but are likely to benefit from the government’s pro-growth agenda,” the report said.
The survey attributed sluggish reform as the biggest risk (47%) to India’s macroeconomic recovery over a period of 12-18 Months. Infrastructure constraints occupied the second spot (38%) while external factors came in at the third place (10%). Inflation and fiscal performance came as the fourth and fifth biggest concerns.
In the poll, when the respondents were asked what would be the key driver of credit conditions for Indian corporates over the next 12-18 months, 56% thought it would be government policy implementation while 23% felt interest rate would be that trigger. Commodity price weakness and external factors occupied the third and fourth places, respectively.
Despite government claims of removing the bottlenecks in execution in granting clearance to projects, the survey showed that the project approval delays was the biggest challenge facing the infrastructure sector, followed by lack of access to funding, weak financial health of the sector, and loss of reform momentum.
On banking sector, the survey pointed out that “banks will continue to wrestle with weak asset quality in the coming 12 to 18 months, which will act as a constraint on overall economic growth”.
Other research and rating highlights in this edition include:
- India’s Pro-Cyclical Industries to Benefit from Improving Credit Conditions Through 2016
- India Infrastructure: India’s LNG Import Boom Is Credit Positive for GAIL, PLL
- Indian Public-Sector Banks’ Credit Profiles to Improve Only in the Medium Term
- India and Indonesia: Peer Comparison Reform Implementation to Determine Credit Trajectories