Global rating agency Moody's has changed India's rating outlook on Thursday to positive from stable on expectations that the government's reform programmes would enhance the growth of the economy.
While affirming the government of India's Baa3 issuer and senior unsecured ratings the rating agency stated, “Moody's expects these structural advantages, supported by relatively benign global commodity prices and liquidity conditions, will keep India's growth higher than that of its peers over the rating horizon.”
It said the recent measures to address inflation, keep external balances in check, simplify the regulatory regime for investors, increase foreign direct investment (FDI) and facilitate infrastructure development will reduce some of India's sovereign credit constraints.
Many of these measures are at relatively early stages of design and have yet to be implemented. According to Moody's, the ability of policymakers to strengthen India's sovereign credit profile to a level consistent with a higher rating will become apparent over the next 12-18 months.
Narendra Modi-led government has implemented a slew of reforms in past 11 months to improve the ease of doing business in the country by removing policy constraints in certain sectors. The government has also put in place measures to boost infrastructure and manufacturing in the country while further opening sectors like defence and insurance to FDI.
Moody's said that evidence over the coming months that policymakers are likely to be successful in their efforts to introduce growth-enhancing and growth-stabilising economic and institutional reforms, would allow it to upgrade India's rating further.
On the other hand, the rating outlook would be revised back to stable if economic, fiscal and institutional strengthening appeared unlikely, or banking system metrics remained weak or balance of payments risks rose.
Meanwhile, while retaining the Baa3 government bond rating, Moody's said it reflects India's weaker performance -- relative to peers -- on fiscal, inflation and infrastructure-related metrics. And while policies are beginning to address each of these factors, the extent of likely improvements is as yet unclear.
“Moreover, India's banking system's asset quality, loan loss coverage and capital ratios are relatively weak. This poses sovereign credit risks because of the banking sector's role in financing growth as well as the government's deficits through its purchase of government securities, and the contingent liabilities due to the government's ownership of a major portion of the banking sector,” it said.
The rating agency added that in the absence of any improvement in banking-system metrics over the coming months, India's sovereign credit profile will remain constrained.
The Baa3 rating incorporates the risk that higher levels of growth and infrastructure development will be accompanied by higher leverage. Sovereign credit improvements over the next 12-18 months will depend on the extent to which growth, policies and buffers can contain the risks associated with rising leverage, Moody's noted.
For an economy which is pegged as the fastest growing major economy in the world, India has still a long way to go. While Modi government has been able to implement reforms in coal and mining sector, its amendments to land acquisition bill has met with serious opposition and is still to see the light of the day. It would be an uphill task for the government to get the bill passed from the upper house of the parliament, which is controlled by the opposition.
International organisations have pegged the GDP growth to be 7.8-8 per cent for the current fiscal with the government expecting India to grow 8-8.5 per cent. Reserve Bank of India released its survey of professional forecasters on Wednesday which pegged the growth in Indian economy at 7.8 per cent for the current fiscal.
Other surveys also show that the economic situation is improving but a lot would depend on the government's ability to implement the reforms and to get other bills through the parliament.
(Edited by Joby Puthuparampil Johnson)