Implementation of the Goods and Services Tax and bridging large infrastructure deficit are a difficult task before the Indian government, Moody's Investors Service said on Wednesday.
In a report, Moody's said a history of double-digit inflation, elevated government debt, weak infrastructure and a complex regulatory regime have constrained India's credit profile.
"We also expect that some aspects of the government's policy agenda -- such as the implementation of GST and bridging India's large infrastructure deficit -- will still face an uphill climb," it said.
As a positive, Moody's noted that easing of constraints on investment coupled with RBI's inflation targeting and ongoing efforts to clean up bank balancesheets could propel growth.
Moody's has a 'positive' outlook on its 'Baa3' rating on India, which is just a notch above the junk grade.
"Our positive outlook on India's rating is based on our expectation of continued but gradual policy efforts to reduce the sovereign risks posed by high fiscal deficits, volatile inflation and weak bank balancesheets," it said.
"The government has, in successive Budgets, stuck to its fiscal consolidation targets. Meanwhile, the central bank's adoption of inflation targeting and ongoing efforts to clean up bank balancesheets will lower financial risks that would otherwise develop as growth accelerated."
The government has eased constraints on private investment, both foreign and domestic, which should support growth and the balance of payments.
Indirect tax reform GST is currently stuck in the Rajya Sabha where the ruling National Democratic Alliance does not enjoy a majority.
A single rate GST will replace central excise, state value added tax, entertainment tax, octroi, entry tax, luxury tax and purchase tax on goods and services to ensure seamless transfer of goods and services.
Besides, the government is working on steps to modernize India's infrastructure and is looking for avenues to fund development.
It has set up a maiden sovereign wealth fund, NIIF, and is scouting for investors to buy 51 per cent stake in it.
The government holds 49 per cent in NIIF.
In its report on Asia-Pacific sovereigns, Moody's said high levels of public and private sector debt may weigh on sovereign credit quality as growth cools and financing conditions tighten.
"Each government's policy effectiveness will determine how its credit profile navigates this climate of subdued demand and greater financial uncertainty," it said.
According to Moody's, policymakers across Asia face the challenge of reviving domestic growth in an environment of depressed global demand.
"Lower commodity prices and muted inflation offer monetary policy space to many central banks.
“However, most countries in the Asia-Pacific have less room for fiscal stimulus than they did prior to the global financial crisis," the rating agency noted.
