Acknowledging India’s step-wise reforms amidst muted private investment and NPA challenge, Moody’s Tuesday said that it could upgrade India’s rating in 1-2 years if it is convinced that reforms are tangible.
While Moody’s currently has a Baa3 rating on India with a positive outlook, it said that the upgrade will depend on affirmation of policymakers working towards faster fiscal consolidation, reduction in debt-GDP ratio and in addressing the infrastructure and monsoon volatility challenges.
“We have a positive outlook on India. On balance, the risk is on the upside. We are continuously monitoring the rating. We see pressure building up in 1-2 years and any tangible change could bring about a change in rating,” said, Moody’s sovereign group senior VP, Marie Diron on Tuesday.
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It however maintained that structural hurdles will continue to constrain private sector investment and growth and that the banking sector will continue to pose contingent liability risks to the government over the near to medium-term. Diron further added that the external sector vulnerability and geo-political risks could pose additional pressure.
The rating agency listed six pending reforms in India – land acquisition bill, labour law reforms, significant infrastructure investment, tangible benefit from Make in India initiative, tax administration and PSU bank reforms.
Earlier, in April, Moody’s Investors Service had revised India’s outlook to positive from stable and said that it could upgrade rating in 12-18 months.
Moody’s however, seems to be disappointed with the pace of private investment. Speaking in Delhi, Diron said, “We have seen progress in implementation of reforms. What we did not anticipate is the weakness of private investment.” He further said that reforms have been slow and gradual and we are waiting for that confidence that reforms will be tangible and able to change investor confidence.
The rating agency however, termed the passage of GST, bankruptcy law, and inflation-targeting monetary policy as credit positive. While it expects the implementation of GST will enhance revenue collection for the government over time, through better tax compliance and higher profits Moody’s pointed that effective implementation of measures such as — ease of restrictions on foreign direct investment, bankruptcy law, improved access to bank accounts, and measures related to ease of doing business would bolster India’s growth potential.
Meanwhile, the finance ministry will pitch for the country’s rating upgrade with Moody’s on Wednesday, highlighting increased pace of reforms including the GST, declining inflation and improvement in fiscal as well as current account deficit situation. “Representatives from Moody’s will meet Economic Affairs Secretary and other finance ministry officials on September 21,” a source was quoted by PTI as saying.