India’s easing of FDI rules is a credit positive as it shows a continuation of reform momentum, paves the way for private investment and boosts productivity, Moody’s Investors Service said today.
The credit rating agency, which has a ‘Baa3’ with a stable outlook on India, said in a report that higher FDI inflows will help support the country’s external financing needs at a time of moderated FII inflows.
Government had last week announced FDI liberalisation in nine sectors such as civil aviation, retail and private security services. This was the current government’s second round of relaxation in FDI rules.
Moody’s said: “The announcement is credit positive because it demonstrates a continuation of reform momentum and paves the way for private investment and a boost in productivity. Additionally, higher FDI inflows will help support India’s external financing needs at a time when portfolio flows have moderated.”
It added however that “stronger FDI alone will not deliver markedly higher growth and productivity in India. FDI currently accounts for less than 10 per cent of total fixed asset investment and will not substitute for muted domestic private investment. Growth in total investment remained soft at 3.9 per cent in fiscal 2016”.
Net foreign direct investment (FDI) inflows have increased over the past two years, reaching record highs of USD 36 billion in the last financial year from USD 24.2 billion on average during the preceding three fiscal years.
Moody’s said that despite some progress in improving the operating environment and easing investment procedures, reforms have stalled in two key areas: passing a unified Goods and Services Tax and the Land Acquisition Act.
“We expect that political division will keep the reform process uneven and slow-moving,” Moody’s said.
It said higher FDI will reduce other external financing needs, a positive at a time when the portfolio flows into India and other emerging markets have been volatile.
“We expect FDI inflows to remain robust given the development of industrial corridors, which will form a network of industrial bases between India’s big metropolitan cities and investment and manufacturing zones under the ‘Make in India’ and ‘Smart Cities’ initiatives,” it said.
Moody’s said FDI liberalisation illustrates that the government’s reform agenda remains on track.
“Sustained, albeit gradual, reform momentum contributes to improving the business environment and establishing a more stable macro-economic environment through gradual fiscal consolidation and credible monetary policy,” the report said.
Furthermore, by fostering the adoption of innovative technologies, FDI can help raise India’s productivity and growth potential and support economic growth over the next three to five years.
Currently, higher FDI inflows come as a boon for the current account deficit, which was 1.1 per cent of GDP in 2015-16, down from 4.8 per cent in 2012-13.
The note said FDI inflows provide a stable source of financing and mitigate downside risks to the current account from potential weakness in service exports and remittances.
“Continued high corporate leverage, eroding corporate profits and impaired credit supply will thwart investment activity for at least several quarters,” the agency said.