NEW DELHI: Implementation of the Goods and Services Tax and bridging India’s large infrastructure deficit still face an uphill climb, global ratings agency Moody’s Investors Service said on Wednesday as it lauded some of the reform measures unveiled by the Narendra Modi government.
It said that elevated government debt, a history of double digit inflation, weak infrastructure and a complex regulatory regime have constrained the sovereign credit profile. The agency has a Baa3 rating with a positive outlook on India, which is a notch above junk bond rating.
“Our positive outlook on India’s rating is based on our expectation of continued but gradual policy efforts to reduce the sovereign risks posed by high fiscal deficits, volatile inflation and weak bank balance sheets,” the ratings agency said in a new report.
“The government has, in successive budgets, stuck to its fiscal consolidation targets. Meanwhile, the central bank’s adoption of inflation targeting and ongoing efforts to clean up bank balance sheets will lower financial risks that would otherwise develop as growth accelerated,” the agency said.
It said the government has eased constraints on private investment, both foreign and domestic, which should support growth and the balance of payments.
But it expects some obstacles to the government’s reform agenda.
“However, we also expect that some aspects of the government’s policy agenda – such as the implementation of the Goods and Services Tax (GST) and bridging India’s large infrastructure deficit – will still face an uphill climb,” the agency said.
The ratings agency bad loans in state-run banks expose the government to some risk
“In Bangladesh (Ba3 stable) and India, impaired loans at state-owned banks expose the governments to risk. In India, public sector banks hold more than 70% of banking sector assets, while in Bangladesh they account for around 30%. In both countries, the authorities are taking action to strengthen the banking systems,” it said.
“The strong funding and growing share of privately run banks in Bangladesh, and the fact that retail deposits are the primary source of funding for Indian banks, and they comply comfortably with liquidity requirements are important buffers,” the agency said.
It said despite decelerating economic growth and financial uncertainty, rating outlooks are mostly stable across Asia Pacific, although negative outlooks outnumber positive ones.
“Looking ahead, three factors will likely determine sovereign credit trends in the region. First, the degree and nature of the build-up in leverage, and the extent of buffers that counterbalance related risks. Second, how economies respond to the opportunities and challenges offered by China’s rebalancing,” the agency said.