Will upgrade India's rating if govt reform, key indicators improve: Moody's

Moody's Investors Service on Tuesday said it could upgrade India's rating if the government's reform agenda is implemented and key macroeconomic indicators like inflation remain under control over 2016.

"India's rating could be upgraded if Moody's expectations of gradual but credit positive reforms are realised in actual policy implementation and if the recent improvement in inflation, fiscal and current account ratios is sustained," it said.

Moody's has a 'Baa3' rating on India with a positive outlook. Since 2004, Moody's has rated India at 'Baa3', the lowest investment grade just a notch above 'junk' status.

"The rating could be upgraded if the above expectations are reflected in policy progress and macroeconomic indicators over the next year, and if we view this progress as sustainable," it said in a report on the Indian Government.

Moody's said the positive outlook is based on the expectation of implemented policies which are likely to lower sovereign credit risk by stabilising inflation, improving the regulatory environment, increasing infrastructure investment while maintaining the ongoing improvement in fiscal ratios.

It, however, cautioned that the rating outlook would likely return to stable "if there is a slowdown in or reversal of the policy reform process; if banking system metrics continue to weaken, or, if there is a decline in foreign exchange reserves coverage of external debt and imports".

Moody's said that lower oil prices as well as tighter fiscal and monetary policies have helped restore macro-economic balance.

"As a commodity importer, India benefits from a low commodity price environment, and its reliance on domestic demand for GDP growth shields the economy somewhat from the subdued outlook for global growth," it said. 

Moody's has forecast India to expand at 7 per cent in the current year and is still likely to surpass the average for its peers, as it has over the last decade.

It said the consequence of tighter policies is that GDP and investment growth are likely to remain at levels that are lower than their peaks of a decade ago.

It said the government s efforts to revive private investment, particularly in manufacturing, appear to be key to a sustainable growth recovery.

"If successful, an acceleration in manufacturing investment will also alleviate the economy s current vulnerability to fluctuations in agricultural output, which makes up 17 per cent of GDP, but a much higher proportion of employment," it said.

Moody's said a deterioration in macro-economic balance between 2011 and 2013, coupled with political and policy uncertainty ahead of 2014 national elections could have contributed to the decline in India s competitiveness scores.

"Over the last year, India s performance on inflation and the balance of payments have improved, reflecting policy efforts.

"However, a sustained improvement in its relative ranking on competitiveness indicators will depend on the extent to which the government s stated commitment to improving the operating environment is reflected in infrastructure and regulatory conditions," it said.

It said an improvement in India's institutional strength holds the key to improved economic strength.

"We rank India s institutional strength as moderate (-) relative to all other countries in the Moody s-rated universe."

Institutional strengths are apparent in India s robust democratic apparatus, including freedom of the press, and an entrenched system of checks and balances among government branches.

"Offsetting weaknesses include an uncertain regulatory environment, a slow-moving judicial system, a series of corruption scandals, and inefficiencies in delivery of government services. We also use price stability as a gauge for policy effectiveness, and India's high and recurrent inflation partly a result of regulatory and infrastructure constraints reflects institutional challenges," it said.

Moody's said the positive outlook on India's rating incorporates the view that authorities are making efforts to address some of these institutional constraints.

"However, we do not expect these efforts to result in a shift in governance or growth indicators in the near term. If these efforts are successful, however, stronger institutions are likely to also result in an improved operating environment for investment and growth, over a three to five year period," it said.