BackIndia’s growth more vulnerable to external risks: Moody’s
Of those surveyed in a poll, 35% saw external shocks as the greatest challenge facing India's economy, up from just 10% in Moody's previous poll in May
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New Delhi: India’s growth story is now more vulnerable to potential spillover of external risks such as interest-rate tightening in the US and China’s ongoing slowdown than seven months ago, according to a poll of investors conducted by rating agency Moody’s Investor Services and its Indian arm ICRA Ltd earlier this month.
Of those surveyed, 35% saw external shocks as the greatest challenge facing India’s economy, up from just 10% in Moody’s previous poll in May.
However, Moody’s said this is more likely a reflection of the broad-based spike in global risk-aversion rather than India’s relative vulnerabilities. “Investors still regard the country as much better placed than most of its similarly rated emerging market peers," it added.
The poll suggested the risk from sluggish reform momentum and infrastructure constraints to India’s growth story reduced from their levels in May last year.
Moody’s, however, maintained that India remains better placed to weather a more challenging external environment than many of its similarly rated emerging market peers.
“First, due to lower commodity prices, the country’s current account deficit is much smaller than in previous years. Second, India enters 2016 on the cusp of a cyclical growth recovery, supported by domestic monetary policy easing in 2015, following a reduction in inflation since 2013. Third, the country is much less directly exposed to Chinese demand than most major emerging markets. And finally, the authorities are putting in place a policy framework to address macroeconomic imbalances, as well as infrastructure and banking sector weaknesses," it said.
On the question of what will be the most important driver of credit conditions for Indian companies over the next 12 to 18 months, most participants picked policy implementation (50%) over monetary policy (10%), commodity prices (19%) and external factors (21%).
Moody’s said so far the track record on reform of the Narendra Modi administration has been mixed, with some signs of a loss of momentum in the latter stages of 2015.
“While the government has made some progress on reforms to improve the operating environment and ease investment procedures, progress has been slow in two key areas: passing a unified goods and services tax (GST) and the Land Acquisition Act. Execution of such measures will be important to ensure the crystallisation and sustainability of a recovery in private sector investment in India," it added.
A majority of the respondents (58%) of the poll said a meaningful recovery in private sector capital expenditure will be gradual while 34% said it will be a flat growth in the next 12 to 18 months.
The consensus view on India’s economic growth prospects appears reasonably upbeat with over three quarters of the market participants polled believing that gross domestic product growth will remain in a range of 6.5% to 7.5% over the next 12 to 18 months.
Moody’s has projected GDP growth of 7% in the fiscal year ending March 2016 which is expected to rise to 7.5% in the subsequent financial year 2016-17.
“While high-frequency data remain volatile, the general trend is one of gradual recovery, which we expect to persist in the months ahead. Our expectations of India’s growth outperformance vis-à-vis similarly rated peers, in turn, provides a key pillar of support for the positive outlook on the country’s Baa3 sovereign rating," the rating agency said. Baa3 is Moody’s lowest investment grade rating.
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