'Corruption, scandals impair India's business environment'

Taking note of the Anna Hazare-led agitation for enactment of Jan Lokpal Bill, global credit ratings agency Moody's said on Monday cases of corruption and the recent scandals have impaired business environment in India.

"Corruption, highlighted in recent scandals around the Commonwealth Games as well as telecoms licensing, impairs a business environment. . . .The protests around the Lokpal/Jan Lokpal Bill are also an indication that corruption is a key concern across the country," Moody's said in its annual sovereign credit update on India.

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However, that the agitation also showed the resilience of India's democratic system, it added.

"The most recent policy battle -- over the anti-corruption Lokpal Bill -- provides vivid evidence of the strengths of India's democracy (vociferous and organised dissent that checks government actions) and its challenges (protracted negotiations before any initiatives can be implemented)," Moody's said.

Besides corruption, the agency mentioned bureaucratic logjam and slow pace of judicial decision-making as factors hindering the Indian economy.

"There are some predictable drawbacks to a system engineered to manage a vast and diverse country -- decisions through the bureaucratic apparatus still move slowly and the judicial system is burdened with a huge backlog of cases.

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"Moreover, in functioning as a conduit for vastly diverging interests, policies suffer from a prolonged negotiation period and the addition of caveats," Moody's said.

According to the agency, both domestic business confidence and foreign inflows may suffer in the wake of a global slowdown and called for policy actions to deal with it.

"At this point, policy actions to spur future investment may best guard India's growth against the confidence impact of a global slowdown," it said.

Despite various drawbacks, the country's democratic system, a free press and well defined system of checks and balances allows the political process to build a consensus

regarding the interest of a billion-plus population of diverse culture, ethnicity and economic inequality, the report said.

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On the economic front, Moody's said the government's target of reducing fiscal deficit to 4.6 per cent of gross domestic product in 2011-12, down from 4.7 per cent in the previous fiscal, is unlikely to be met.

"Since the real growth assumptions of the budget, announced in February 2011, are now unlikely to be realised and there is a chance of expenditure overruns, we expect that the central government's actual deficit at the end of the fiscal year may be higher than targeted. . .," it said.

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"Although revenue buoyancy has helped reduce government deficits during upswings in the business cycle, there has been little improvement in the structure of government expenditures and the tax net has widened only incrementally," it said.

Moody's said that any likelihood of reduction in overall expenditures in the near term is also low.

"Expansion of the National Rural Employment Guarantee scheme, the recently enacted Right to Education Act, and a proposed Food security Bill could create long term expenditure claims that revenue strategy is ill-equipped to match," it added.

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"We expect the Indian government to continue infusing fresh equity into public-sector banks as part of its recapitalisation plan. Private-sector banks have sufficient

capital to grow at above system average rates over the next one-to-two years," Moody's said.
It also added, "Besides drain on government resources, inefficiencies in state-owned enterprises reduce overall productivity.

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Pegging the country's GDP growth at 7.5-8 per cent this fiscal, Moody's said the country's economy is vulnerable to external factors.

"India's resilience to the global economic downturn following the financial crisis in 2008 may well be tested again in the coming months, as a likely global economic slowdown coincides with the country's own business cycle trough," it said.

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India's economic system is resilient and banks have the buffers to absorb the envisaged losses, Moody's added.

Senior government officials have in recent months said that the country's economic growth is likely to be only around 8.5 per cent this fiscal, as against its initial projection of 9 per cent made in the February pre-Budget survey.

The Reserve Bank of India has pegged GDP growth to be 8 per cent in 2011-12.

India's economy had expanded by 8.5 per cent in the last fiscal.