Moody's: India's Policy Changes 'Aim to Accelerate Growth and Ease Rating Constraints'

India's economic, fiscal and financial reforms will, if successfully implemented, sustain higher GDP growth and address some of the constraints on India's sovereign credit profile, Moody's said on Thursday 30 September.

"Higher investment and lower macro-economic imbalances could sustain growth rates of around 7.5% over the next 5-10 years. Such a result would be significantly higher than the 5-6% growth Moody's expects for India in 2015," Moody's said.

The rating agency said it has analysed the potential impact of labour and investment policies that comprise the Make in India campaign, financial inclusion measures, infrastructure development initiatives, clarity around inflation targets, as well as banking and energy sector reforms, to come to such a conclusion.

Moody's said these measures are incremental rather than radical but together, they will harness the country's economic advantages of size, diversity and a deep pool of labour and savings.

It added: "They will also improve its investment climate and allow the economy to reap the benefits of lower global commodity prices and international financial flows seeking real investment assets."

The rating agency said evidence from other countries and India's own experience in the prior decade show incremental reforms can raise productivity, savings and investment growth.

Moody's said: "In addition, if policies lower fiscal deficits, stabilise inflation and strengthen the banking sector, they will mitigate the macro-economic and financial risks to growth that have been evident in the last three years."

Likelihood of Rating Revision

Since India's sovereign rating already incorporates Moody's assessment that its growth potential is high, such higher growth rates would, in themselves, be of limited (though positive) significance for India's sovereign credit profile, the rating agency said.

It added: "Still, the effective implementation of all the above policies could have further positive sovereign credit implications, if they demonstrate rising institutional strength or lower vulnerability to event risk."

Moody's said it would revisit its assessment of India's institutional strength if inflation metrics, investment climate, policy predictability and transparency were to show sustained improvement.

"Stronger fiscal, balance of payments and banking sector metrics would lower the country's vulnerability to event risk," it said.

However, given the early days and the incremental nature of policy change, Moody's said it expects it will take several quarters for an improvement in quantitative and qualitative credit metrics to crystallise.