Keeping India's credit outlook unaltered, global rating agency Moody's on Monday projected the country's GDP (gross domestic product) growth for the current fiscal at 7.5-8 per cent and cited high domestic interest rates coupled with the current global uncertainties as the near-term factors that could affect its economic expansion.
Pegging India's overall growth for 2011-12 at the same level as estimated by the Reserve Bank of India, Moody's noted in its annual sovereign credit update on India that the ‘cyclical slowdown' was unlikely to alter its credit outlook.
“Moody's expects GDP growth of 7.5-8 per cent in 2011-12 … Given current global uncertainty, and the continuing transmission of the RBI's tightening over the last year, the risks to both forecasts are on the downside … Although rising domestic interest rates and an uncertain global economic environment could dampen India's near term GDP growth, a cyclical slowdown is unlikely to alter its credit outlook,” the report said.
On the inflation front too, Moody's analysis is in sync with the view held by the RBI in that inflation is likely to moderate to around 7 per cent by the end of the fiscal in March, 2012.
“Moody's expects ... inflation to abate slowly over the course of the year to about 7 per cent ... Should global growth decelerate, the concurrent decline in global commodity prices would alleviate India's inflation problem and likely allow for a pause or even reversal in monetary tightening,” the rating agency said.
Moody's, however, highlighted the concern over investment slowdown, a major issue that India Inc. has also been citing for bringing about a pause in further rate hikes by the RBI.
“Of concern is the apparent slowdown in investment in recent months, blamed on rising domestic financing costs as well as policy uncertainty in the wake of recent telecoms related scandals,” Moody's said.
Alongside, the Moody's report also pointed to the limited room for further fiscal stimulus, given the fact that the government has targeted to cap the fiscal deficit at 4.6 per cent of GDP in 2011-12, down from 4.7 per cent last fiscal. Turning to the rating aspect, Moody's noted that its outlook on India's ‘Baa3' foreign currency government bond rating remained stable with a ‘Ba1' rating on the country's local currency debt. “The outlook on the country's ‘Baa3' foreign currency government bond rating is stable. The gap between the ‘Baa3' foreign currency debt and ‘Ba1' local currency debt ratings reflects the potential likelihood that the government could prioritise its external obligations over its domestic obligations,” it said.
Pointing to India's strong medium to long-term economic potential by way of demographic profile, robust savings and investment rates and rising global competitiveness of its corporations, Moody's said: “Indian economy has demonstrated resilience to political, economic and financial shocks over the years.
“While it is not immune to an international growth slowdown, the strength of domestic demand and the diversity of the economy provide a buffer against a deceleration in globally exposed sectors.”
The buffer, it said, is the country's foreign currency assets, which are almost four times its annual foreign debt repayment obligations. “Moody's expects that this ample stock of reserves will facilitate meeting foreign exchange obligations, should external shocks lead to a cessation of foreign exchange inflows for a significant period,” the report said.
Alongside, while noting that the recent corruption cases and scandals have impaired the country's business environment currently, the agitation led by Anna Hazare also showed resilience of India's democratic system. “Corruption, highlighted in recent scandals around the Commonwealth Games as well as telecoms licensing, impairs a business environment ...The protests around the Lokpal/Jan Lokpal Bill are also an indication that corruption is a key concern across the country,” it said.
In particular, as proof of resilience of India's democratic system, Moody's said: “The most recent policy battle — over the anti-corruption Lokpal Bill — provides vivid evidence of the strengths of India's democracy (vociferous and organised dissent that checks government actions) and its challenges (protracted negotiations before any initiatives can be implemented).”
