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Moody’s projected India’s economy to accelerate to grow at 7.5% in 2017-18 and 7.7% in 2018-19. Photo: Bloomberg
Moody’s projected India’s economy to accelerate to grow at 7.5% in 2017-18 and 7.7% in 2018-19. Photo: Bloomberg

Centre’s debt burden may ease if GST, NPA resolution implemented: Moody’s

Moody's said that the short-term impact of GST reforms will be muted, but the long-term benefits will include higher productivity growth

New Delhi: Credit rating agency Moody’s Investors Service on Thursday said if the wide-ranging reforms proposed by India such as the Goods and Services Tax (GST), the fiscal framework following the Fiscal Responsibility and Budget Management Act (FRBM) Committee recommendations and non-performing assets (NPA) resolution measures are successfully implemented, it would gradually ease the government’s high debt burden, which represents a key constraint on the sovereign’s credit profile.

Moody’s on Wednesday projected India’s economy to accelerate to grow at 7.5% in 2017-18 and 7.7% in 2018-19 as the government has been able to limit the negative impact of last year’s demonetisation on the economy.

On the GST, which is scheduled to be implemented from 1 July, Moody’s in a report released on Thursday said the short-term impact of GST reforms will be muted, but the long-term benefits will include higher productivity growth due to efficiency gains in business operations, greater investment and an expanded revenue base with enhanced tax compliance.

Moody’s said the FRBM framework that has sought to reduce India’s debt to GDP ratio to 60% by 2022-23 offers an opportunity to anchor fiscal consolidation by setting a medium-term target for the country’s debt burden. “Combined with higher nominal GDP growth, a credible fiscal framework that fosters fiscal responsibility at both the central and state government levels would contribute to the gradual reduction of India’s high debt burden," said William Foster, a Moody’s vice-president and senior credit officer.

On the proposed banking sector reforms, Moody’s said recent government measures to address high NPAs and the promulgation of the Insolvency and Bankruptcy Code 2016 are credit positive for the sovereign, because they provide a clearer framework for NPA resolution. “However, outstanding structural issues remain within the banking system, particularly within public sector banks, which further constrains banks’ abilities to finance potential new investment and, therefore, weighs on private investment," it added.

The report also noted that the government’s use of information collected from demonetisation and financial inclusion efforts could help broaden the tax base by ushering in the previously unbanked informal sector. “Recent expenditure reforms, including direct benefits transfer, should improve expenditure efficiency, while the Aadhaar identification system can help reduce fiscal leakage," it added.

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