Moody’s caution on Indian economy
The Hindu Business Line, May 29, 2009, Page 10
Our Bureau, New Delhi
Moody’s Investor Service cautions India against various challenges in the macroeconomic management and a backlog of structural reforms, even as its ratings outlook for the Indian government’s foreign currency rating and local rating is stable.
In a new report released today, Moody’s Vice-President and Senior Analyst, Aninda Mitra, said India’s ratings are based on Moody’s assessment of the country’s moderate levels of economic and institutional strength that in turn are bolstered by a large, rapidly growing and well-diversified economic structure.
The key arguments advanced in the report deal with the constraint exerted on India’s economic potential by domestic imbalances and financial fragilities; the risk posed to economic performance by the confluence of potentially weak external liquidity and the persistence of government deficits. These shortcomings coupled with sectoral imbalances, low rural income and still-pervasive infrastructural bottlenecks constrain more rapid improvements, it said.
While economic liberalisation and de-licensing have facilitated a strong productivity response and led to greater competition, capacity building and growth in several industry sectors, fiscal policy predictability and credibility have worsened, the report said. “The stable outlook on the ratings has recently faced growing pressure, mainly due to substantial deterioration in the fiscal position amidst a rise in India’s dependence on foreign capital flows to drive its investment cycle”, it added.
Stating that a time of a sharp deceleration in private investment and falling capacity utilisation, the much higher level of fiscal deficit is not expected to result in price pressures or credit crowding, the report contends that with private sector resuming growth from latter part of 2009, the availability of domestic financing could be crowded out if the large fiscal easing is not unwound quickly.
It further said if the new government is able to re-commit itself to fiscal restraint in a credible manner or alter the financing mix of the deficit (to include greater reliance on disinvestment), such developments could better support “our views about the institutional framework underpinning macroeconomic management”.
Pointing out that large government borrowing needs have slowed the development of private bond markets for domestic corporations, the report said this has driven greater reliance on equity issue and foreign borrowings. “Consequently, disruptions in global or local capital markets affects private corporations’ fund raising capabilities much more than at comparable emerging market countries with more fiscal space”, it said.
While appreciating statutory and regulatory bodies for being effective and less heavy- handed than in earlier decades, the report highlights slow and cumbersome bureaucracy. It said the overall quality of governance in the context of policy implementation is poor and in particular, the provision of public goods and services has suffered.
The Hindu Business Line, May 29, 2009, Page 10
Our Bureau, New Delhi
Moody’s Investor Service cautions India against various challenges in the macroeconomic management and a backlog of structural reforms, even as its ratings outlook for the Indian government’s foreign currency rating and local rating is stable.
In a new report released today, Moody’s Vice-President and Senior Analyst, Aninda Mitra, said India’s ratings are based on Moody’s assessment of the country’s moderate levels of economic and institutional strength that in turn are bolstered by a large, rapidly growing and well-diversified economic structure.
The key arguments advanced in the report deal with the constraint exerted on India’s economic potential by domestic imbalances and financial fragilities; the risk posed to economic performance by the confluence of potentially weak external liquidity and the persistence of government deficits. These shortcomings coupled with sectoral imbalances, low rural income and still-pervasive infrastructural bottlenecks constrain more rapid improvements, it said.
While economic liberalisation and de-licensing have facilitated a strong productivity response and led to greater competition, capacity building and growth in several industry sectors, fiscal policy predictability and credibility have worsened, the report said. “The stable outlook on the ratings has recently faced growing pressure, mainly due to substantial deterioration in the fiscal position amidst a rise in India’s dependence on foreign capital flows to drive its investment cycle”, it added.
Stating that a time of a sharp deceleration in private investment and falling capacity utilisation, the much higher level of fiscal deficit is not expected to result in price pressures or credit crowding, the report contends that with private sector resuming growth from latter part of 2009, the availability of domestic financing could be crowded out if the large fiscal easing is not unwound quickly.
It further said if the new government is able to re-commit itself to fiscal restraint in a credible manner or alter the financing mix of the deficit (to include greater reliance on disinvestment), such developments could better support “our views about the institutional framework underpinning macroeconomic management”.
Pointing out that large government borrowing needs have slowed the development of private bond markets for domestic corporations, the report said this has driven greater reliance on equity issue and foreign borrowings. “Consequently, disruptions in global or local capital markets affects private corporations’ fund raising capabilities much more than at comparable emerging market countries with more fiscal space”, it said.
While appreciating statutory and regulatory bodies for being effective and less heavy- handed than in earlier decades, the report highlights slow and cumbersome bureaucracy. It said the overall quality of governance in the context of policy implementation is poor and in particular, the provision of public goods and services has suffered.
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