Moody's not bullish on reforms, policy change

Moody's does not expect India to either increase the pace of policy change or expand the scope of reforms, writes Faisal Kidwai

The rating agency, which has recently further lowered India's growth forecast for 2012 to 5.5 per cent and for 2013 to below six per cent, says high fiscal deficit and debt ratios remain one of the biggest constraints.

"India is in the midst of a cyclical downturn, which is exacerbated by subdued global growth conditions as well as domestic drought-like conditions," says Atsi Sheth, Vice-President and Senior Analyst, Sovereign Risk Group, Moody's Investors Service.

"The Indian economy has certain favourable features which will endure through the downturn, and will facilitate an eventual acceleration in growth," she says.

These include a) its diverse sectoral sources of growth, b) a private sector comprising large, small and medium enterprises that has managed to increase competitiveness in the past despite infrastructure and policy limitations and c) the country's favourable demographics, according to the analyst.

On the other hand, India also has certain structural weaknesses that exacerbate the slowdown and could delay an upturn. For example, India's continued inflationary pressures owe partly to commodity prices, but also to loose fiscal policy and supply side constraints.

These inflationary pressures, in turn, limit monetary policy responses to reverse the growth slowdown, says Sheth. Over time, we expect certain policy measures to be initiated in order to address these fiscal and infrastructure constraints. However we expect that, given the political and administrative process in India, the pace of policy change will probably be slow and the scope of reforms will be fairly modest, she says.

Sheth says even during the downturn, India's growth rate is above the rate experienced in several similarly rated countries.

When asked about his biggest concerns regarding the economy, she says "from a sovereign credit risk perspective, the credit challenges remain the same as they have been in the past".

"Most prominent among India's sovereign credit constraints are the high fiscal deficit and debt ratios, weak social and physical infrastructure, and an uncertain policy environment," says the analyst.

None of these structural weaknesses is a recent development. We had highlighted all of these constraints when GDP growth was higher, and our view on them remains the same over the last few months as growth has slowed, says Sheth.