India's GDP Growth Expected at 7.7 % This Fiscal: Moody's

SMEStreet Desk
New Update
marie diron, moodys

Listing budget targets, private investment and bank liabilities as the main challenges for India, Moody's has projected India's gross value added (GVA) growth to rise to 7.7 percent this fiscal with mixed trend in inflation.

NEW DELHI: Marie Diron, Senior Vice President with Moody's Sovereign Group, saw India's credit rating materialising in the medium term based on reforms, which could potentially stabilise the macro-economic environment that is conducive to fiscal consolidation.

"In the nearer term, challenging budget targets could lead to significant spending cuts late in the fiscal, especially since in the first four months of the fiscal year, 74 percent of the whole year's budget target has already been reached," Moody's Investors Service said.

Besides Diron, the press conference was addressed by Aditi Nayar, Senior Economist with ICRA, an affiliate of Moody's in India, who expected the country's growth-inflation dynamics to display mixed trends during the current fiscal.

"Specifically, growth of GVA (gross value added) at basic prices is set to improve to 7.7 percent from 7.2 percent in FY2016 on the back of domestic consumption demand, amid a hardening of CPI inflation to an average of 5.1 percent from 4.9 percent over the same period," she added.

Gross value added as opposed to gross domestic product is considered a better measure of economic performance as it excludes taxes and subsidies while calculating a country's output.

According to Moody's, some measures, if effectively implemented, can push India's growth, notably an easing of restrictions on foreign direct investment to foster productivity, bankruptcy law for enhancing investor confidence and measures aimed at ease of doing business.

"However, these reforms will ease rather than remove some of the hurdles to robust and sustained investment, and therefore growth in India. In the nearer term, private investment will remain weak as corporates in investment-intensive sectors are burdened by elevated debt," it said.

The economy will also remain vulnerable to monsoon rains due to partial crop irrigation and slow progress in creating food storage and transport infrastructure. Infrastructure will continue to constrain investment, and foreign investment can't make up domestic investment, it added.

"Structural hurdles will continue to constrain private sector investment and growth, and banking sector will continue to pose contingent liability risks to the government over the near to medium term," it said.

The agency advocated a multi-pronged, but step-wise approach, to reforms to ensure stable, robust growth, moderate inflation and narrower budget deficits. It also expected the monetary policy to focus on containing inflation, and said this was a credit positive for India.

"In terms of the monetary policy framework, the Government of India has notified retail inflation target of 4 percent, within a tolerance band of 2-6 percent until March 2021. Such a scenario would help to anchor inflationary expectations," said Diron.

Speaking about the shift to a pan-India goods and service tax regime, Moody's said this will only enhance revenue collection for the government over time, through better tax compliance and higher profits, as businesses save on tax administration costs.

The agency said banking sector risk will also remain a constraint on India's sovereign ratings.

"While bad asset recognition is a first step, the measure does not strengthen the resilience of banks, and therefore does not reduce the contingent liability risks for the sovereign," it said in a statement issued at the conference.

"Moody's estimates that fiscal costs of equity injections in public sector banks are manageable, although they are larger than currently budgeted and will add to the government's challenge in meeting its fiscal targets."

Economic Growth Marie Diron Moody's India GDP