20/09/2016 9:22 PM IST | Updated 20/09/2016 9:58 PM IST

Moody's Hints India Sovereign Rating May Stay Put Even As Govt Pitches For Upgrade

More reforms and faster fiscal consolidation needed

Adrian Pope

Just one day before India's Finance Ministry was about to make a case for an ratings upgrade for India, international credit ratings agency Moody's Investors Service has indicated a review is likely not on the near-term horizon in part because of ongoing weakness in private sector investments.

Moody's currently has a BAA3 sovereign rating for India and a positive outlook, which it had revised from 'stable' last year, noting India's progress in reforms.

However, the agency will need to see "more evidence over time of faster fiscal consolidation, more tangible reforms and resolution of the asset quality of the banking sector" before it reviews the ratings which is likely at least one or two years away, Marie Diron, Senior Vice-President, Sovereign Risk Group, Moody's Investors Service told the Hindu BusinessLine.

"The credit implications of India's reforms will materialise in the the nearer-term, challenging budget targets could lead to significant spending cuts late in the fiscal year, especially since in the first four months of the fiscal year, 74 per cent of the whole year's budget target has already been reached," Diron said in a press statement.

Diron warned the private sector investment and growth may continue to be constrained due to structural hurdles. She also noted the ongoing liability risks from the banking sector to the government in the near-to-medium term.

On Monday, PTI reported that Economic Affairs Secretary, Shaktikanta Das, and senior Finance Ministry officials were planning to meet representatives from Moody's to pitch for an upgrade.

Aditi Nayar, a Senior Economist with ICRA, a Moody's affiliate added, "We expect India's growth-inflation dynamics to display mixed trends during the fiscal year 2017." ICRA expects that CPI inflation will record a mild hardening to about 5.1% in FY2017 from 4.9% in FY2016. Moody's expects continuity in India's monetary policy.

While Moody's acknowledged the expected fiscal benefits from the India's goods and sales tax (GST), it pointed out that further measures such as easing restrictions on foreign direct investment, credible bankruptcy laws and further supporting new businesses would inspire investor confidence and growth.

"However, these reforms will ease rather than remove some of the hurdles to robust and sustained investment, and therefore growth in India," it warned. "In the nearer term, private investment will remain weak as corporates in investment-intensive sectors are burdened by elevated debt levels. In addition, the economy will remain vulnerable to fluctuations in monsoon rains, because of the only partial irrigation of crops and gradual progress in food storage and transport infrastructure."

It added that infrastructure gaps will likely continue to constrain investment and the rise in FDI will not make up for muted domestic investment.

ICRA predicts a pick-up in economic growth in India in FY2017, with GVA growth of 7.7 per cent and GDP growth of 7.9 per cent, compared to 7.2 per cent and 7.6 per cent respectively in previous fiscal.