Moody's cuts India growth forecast to 7%; flags monsoon risks

Cautioning that slow reforms pace could dent growth, Moody's Investors Service on Tuesday cut India's growth forecast for this fiscal to around 7% from 7.5% projected earlier, citing below-normal rainfall.

"We have revised our GDP growth forecast down to around 7% in light of a drier-than-average monsoon although rainfall was not as low as feared at the start of the season," Moody's Investors Service said in its 'Global Macro Outlook for 2015-16'.

Saying India's growth outlook is resilient beyond short-term monsoon effects, Moody's has retained growth forecast for 2016-17 at 7.5%.

"One main risk to our forecast is the pace of reforms slows significantly as consensus behind the need for reforms weakens once the least controversial aspects of the government's plan have been implemented," Moody's said.

The key reforms legislation with regard to GST and land acquisition could not be passed by Parliament in the monsoon session because of political logjam.

Moody's growth projection is lower than the estimates of International Monetary Fund (IMF), which projected India to grow at 7.5% in 2015-16.

Both Moody's and IMF's growth projections, however, are lower than the estimates of the Finance Ministry and RBI.

The Ministry expects GDP growth to be 8-8.5% while the RBI has pegged it at 7.6% for 2015-16.

Moody's Sovereign Rating Analyst Atsi Sheth said: "We reiterate that at 7%, we are forecasting India to be among the fastest-growing large emerging markets this year.

And we expect growth to accelerate by next year." Sheth said the GDP forecast hinges on three parameters.

First, the recent macro-economic and bank credit growth data, which shows economic indicators are moving in a positive direction, albeit slowly.

Second, although this year's monsoon is less weak than originally anticipated, its performance was such that a significant boost to rural incomes is unlikely in the near term, limiting an important driver of growth in India.

Last, given generally subdued global growth conditions and uncertain global financial environment, external markets have also not provided a growth boost, Sheth explained.

On inflation, Moody's said: "Barring a large shock to commodity prices or food inflation, we think that the central bank's inflation targets are achievable". 

Moody's Investors Service said economic activity in India will continue to strengthen on the back of a gradual implementation of reforms spurring domestic and foreign investment.

"Maintaining inflation at lower levels than in the past will support real incomes and spending. As long as the central bank's objective is credible, it will also foster investment by providing more visibility about future revenue growth and margins," it said.

Inflation, both wholesale and retail, has hit record lows. While retail inflation was at 3.78%, WPI stood at (-)4.05% in July.

Moody's said growth in 2015-16 will also be supported by an accommodative fiscal policy stance and a Budget that focuses on sustained economic growth as a driver of narrower deficits.

It said as a net importer of commodities, India's growth outlook benefits from the fall in commodity prices over the past year. Also, the country is "little affected" by demand from China and more generally, slower global trade growth.

As regards China, Moody's maintained its baseline GDP growth forecast of 6.8% for 2015 and 6.5% in 2016, before falling towards 6% by the end of the decade.

"The recent stock market correction is unlikely to have a significant impact on China's GDP growth. The depreciation of the renminbi so far will also not have any marked economic impact," it said.

Global economic growth, Moody's said, would be muted over the next two years. It projected G20 GDP growth at 2.7% this year, potentially rising to around 3% in 2016, compared with 2.9% in 2014.

"The recovery in the US and, to a lesser extent, the euro area and Japan, will be offset by the ongoing slowdown in China, low or negative growth in Latin America and only a gradual Russian recovery from its recession this year," said Marie Diron, Senior Vice-President, Credit Policy at Moody's Investors Service.

Moody's said it expects the Brent price to average $57 a barrel in 2016, only a little higher than the 2015 average of $55.