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Moody : India's recent policy changes could ease constraints on overeign credit profile, Moody's says

10/31/2014 | 11:47am US/Eastern

COIMBATORE: Moody's Investors Service has said that the Government of India (Baa3 stable) and the Reserve Bank of India's recent economic, fiscal and financial measures will, if successfully implemented, sustain higher GDP (gross domestic product) growth and address some of the constraints on India's sovereign credit profile.

Moody's analyzed the potential impact of labour and investment policies that comprise the "Make in India" campaign, financial inclusion measures, infrastructure development initiatives, clarity around inflation targets as well as banking and energy sector reforms in a recent report.

Moody's pointed out that these measures are incremental rather than radical. However, together, the various measures will harness India's economic advantages of size, diversity and a deep pool of labour and savings. "They will also improve its investment climate, and allow the economy to reap the benefits of lower global commodity prices and international financial flows seeking real investment assets," the agency said.

Based on evidence from other countries and India's own experience in the prior decade, Moody's said it expects incremental reforms to raise productivity, savings and investment growth. "In addition, if policies lower fiscal deficits, stabilise inflation and strengthen the banking sector, they will mitigate the macro-economic and financial risks to growth that have been evident in the last three years," it said.

Higher investment and lower macro-economic imbalances could sustain growth rates of around 7.5% over the next 5-10 years. Such a result would be significantly higher than the 5%-6% growth Moody's expects for India in 2015.

"Since India's sovereign rating already incorporates Moody's assessment that its growth potential is high, such higher growth rates would, in themselves, be of limited (though positive) significance for India's sovereign credit profile," the agency stated.

"Still, the effective implementation of all the above policies could have further positive sovereign credit implications, if they demonstrate rising institutional strength or lower vulnerability to event risk," it said.

Moody's said it would revisit its assessment of India's institutional strength if inflation metrics, investment climate, policy predictability and transparency were to show sustained improvement.

"Stronger fiscal, balance of payments, and banking sector metrics would lower the country's vulnerability to event risk," the agency said. However, given the early days and the incremental nature of policy change, Moody's expects that it will take several quarters for an improvement in quantitative and qualitative credit metrics to crystallize.

(c) 2014 Bennett, Coleman & Company Limited

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