India’s gross domestic product (GDP) likely grew around 7.3% in the July-September quarter, up from 7% in the first quarter of FY16, but it remained below the country’s potential, Moody’s Analytics said on Friday.
Though India’s potential is around 9-10% GDP growth, it said closing the negative output gap is difficult as external headwinds are blowing stronger and the government has failed to deliver promised reforms.
“We believe GDP will grow at 7.6% this year and in 2016,” it said. Key economic reforms including in land acquisition, a national goods and service tax, and revamped labour laws, would help the country deliver higher GDP growth, it said. The World Bank on Thursday retained growth forecast for India at 7.5% for this year citing a pick up in investment due to higher capital expenditure by the Centre. India’s GDP grew by 7.3% in FY15.
However, Moody’s cautioned that getting the Rajya Sabha nod to some of the key reforms could get obstructed by an “obstructionist” opposition as recent controversial comments from ruling-Bharatiya Janata Party members won’t help the government’s cause. The ongoing state election in Bihar-one of India’s largest and poorest states-could prove pivotal to (prime minister) Modi’s leadership, it said. A win, would help the ruling party secure a majority in the Rajya Sabha. Unlike in the Lok Sabha, the GST bill is held up in the Rajya Sabha as the government does not have a majority in the upper house.
On the other side, the Reserve Bank of India has helped kick-start the economic recovery by cutting the repo rate by 125 basis points this year. Banks have also started passing the rate cut benefits to consumers. Further rate cuts in 2015 are unlikely, Moody’s said.
While global market sentiment has been down, Indian equities have also suffered from a loss in domestic sentiment. Bank balance sheets are still reeling from the economic slowdown in 2013. Profits slumped earlier in the year, and nonperforming loans hit a 14-year high. Thus, banks have been reluctant to expand investment. This explains the little sign of an upward trend in credit growth this year.
There are also indications that investors have been less optimistic about India’s economic prospects. Net financial flows into equity were around $16 billion in 2014. However, they are unlikely to reach those highs this year. The same can be said about financial flows into India’s debt market. The RBI is consistently looking to improve India’s banking and financial structures. “We believe a move towards full capital account liberalisation is inevitable in India. This will likely occur in the next two to four years. A freer capital account will give Indian companies greater access to overseas markets, lower borrowing costs, and facilitate credit growth—a key ingredient to increasing investment,” it added.
Moody’s Analytics Says
-Low interest rates will buttress Indian economy in the short term, but reforms are needed to reach long-term potential growth.
-Better political outcomes could help India achieve reforms
– Financial market sentiment has faded; the stock market and foreign inflows are down
– External headwinds are growing stronger and are hurting India’s exporters
– Further rate cuts in 2015 are unlikely, but there is room for more next year.