India’s economy is unlikely to grow beyond 6 per cent in the current fiscal and will remain “well below the peaks achieved in the previous decade in the next two years” even though the worst is over, say rating agencies.
The country’s sovereign rating, however, could see an improvement if there are positive changes in its infrastructure and regulatory constraints, effective management of inflation and reduction of fiscal deficit and government debt burden.
“India’s Baa3 rating and stable outlook incorporates the likelihood that… India’s GDP growth in the next two years will remain well below the peaks achieved in the previous decade. Looking ahead, there are three key factors that could affect India’s sovereign credit profile, and hence its rating, said Atsi Sheth, lead sovereign analyst, Moody’s Investors Service, to The Indian Express in an emailed response.
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The three factors Sheth idenfitied are — whether infrastructure and regulatory constraints on the country’s long-term growth potential are addressed; how effectively recurrent inflationary pressures are curbed and; the extent to which the fiscal deficit and government debt burden are both reduced.
She added that an improvement in one of these three parameters could lead to improvements in others as well and “trends in these three areas hold the key to trends in India’s sovereign credit profile.”
India’s economic growth rate hit a decade’s low of 4.5 per cent in FY13 due to a steep decline in construction and mining. The International Monetary Fund has projected the Indian economy to grow at 4.6 per cent in FY14 before recovering modestly to 5.4 per cent in FY15.
According to Moody’s, India’s GDP could be in the 5 per cent range in FY15 but a sustained acceleration to growth averages beyond 6 per cent is unlikely, a view seconded by India Ratings.
Sunil Kumar Sinha, director, public finance and principal economist, India Ratings, said the economy is stuck in a phase of low consumption and investment demand and a strong policy push is required to revive the domestic demand cycle in the country, which is in the process of concluding the elections to the 16th Lok Sabha.
Sheth added that India’s next government is still likely to be a coalition government, and even if one of the major national parties were to win a substantial number of parliamentary seats, there could be a sentiment-related effect on the exchange rate immediately following the announcement of election results.
“If the results are viewed positively the exchange rate could see some uplift and if the results are viewed negatively by the market, the rupee could suffer somewhat.”
All the same, amid the expected revival, a weak monsoon due to El Nino may delay the economic recovery by impacting agricultural output, both the rating agencies said.
Weak monsoon will lower GDP from both supply and demand side due to poor harvest and lower rural income, while also leading to food-price inflation and reduced purchasing power.