Recent reforms have improved India’s growth potential and have also given confidence that it will help lower the high level of public debt, says William Foster, Vice-President, Sovereign Risk Group, Moody’s Investors Service. Foster, in an e-mail interview told BusinessLine that Moody’s is optimistic about India’s GDP growth, which is likely to touch 7.5 per cent next fiscal as disruptions from GST and demonetisation fade. Excerpts:
Moody’s was cautious about India's outlook till last year. What prompted the change?
The rating upgrade reflects our expectation that continued progress on economic and institutional reforms will enhance India’s high growth potential and its large and stable financing base for government debt, and will likely contribute to a gradual decline in the general government debt burden over the medium term. Recent reforms also offer greater confidence that the high level of public indebtedness, which is India’s principal credit weakness, will remain stable, even in the event of shocks, and will ultimately decline gradually.
What is your view on short-term growth slowdown due to demonetisation and the Goods and Services Tax?
In the long term, India’s growth potential is significantly higher than most other Baa-rated sovereigns. The range of reforms aimed at improving the business environment, increasing formalisation of the economy or anchoring stable inflation, all contribute to enhancing the economy’s capacity to absorb shocks.
In the near-term, we have revised our GDP growth forecast down to take into account the immediate impact of demonetisation and disruptions related to GST implementation.
We forecast real GDP growth to moderate to 6.7 per cent in the year ending in March 2018. However, as disruption fades, we expect to see a rebound in real GDP growth to 7.5 per cent in the next fiscal year.
What are the next reforms India needs to take?
The government has a vast reform agenda, with some measures already implemented, some at the design stage and some likely more remote. The range of measures include steps towards improving the business climate, fostering foreign investment, encouraging greater formalisation of the economy and establishing a credible and effective monetary policy framework. Other important measures which have yet to reach fruition include planned land and labour market reforms, which rely to a great extent on cooperation with and between the States.
When would the next round of rating upgrade for India be considered?
The stable outlook reflects Moody’s view that the risks to India's credit profile are broadly balanced. The relatively fast pace of growth in incomes will continue to bolster the economy’s shock absorption capacity. And even in periods of relatively slower growth, as seen recently, stable financing will mitigate the risk of a sharp deterioration in fiscal metrics.
The high public debt burden remains an important constraint on India’s credit profile relative to peers and it is not expected to diminish rapidly. Low income levels point to the need for significant development spending needs over the coming years.