Amid exuberance among the market participants after Moody’s credit rating upgrade, and S&Ps recognition of the country’s “strong GDP growth, sound external profile, and improving monetary credibility,” global research firm Fitch’s lowering of India’s growth forecast to 6.7% for the year may have come as a disappointment. While sentiments were upbeat on the back of India’s GDP growth sharply rebounding to 6.3% in fiscal second quarter July-September from a three-year low in the first quarter, Fitch said that India’s latest quarterly GDP growth was a “rebound that was weaker than expected.”
Fitch noted that India’s growth has repeatedly been disappointing in the recent quarters. In October this year, Fitch Ratings had lowered India’s economic growth forecast for the current fiscal to 6.9 per cent from 7.4 per cent after the GDP growth “unexpectedly faltered” in the April-June quarter. Interestingly, S&P had also cited low GDP per capita and weak public finances while retaining its BBB- rating on India with a stable outlook. While there are areas of concern, all the three global credit rating agencies have lauded the country’s long-term structural reforms. We take a look at similarities in their observations.
PSU bank recapitalisation
After the Narendra Modi-led government announced a mega plan of Rs 2.11 lakh crore to recapitalise the stressed public sector banks last month, Moody’s recognised that “measures to address the overhang of nonperforming loans (NPLs) in the banking system,” saying it will advance the government’s objective of improving the business climate. On similar lines, S&P too lauded the move saying, “We anticipate that growth will be supported by the planned recapitalization of state-owned banks, which is likely to spur on new lending within the economy.” Fitch too noted that the reform will help to spur up lending activity of the banks. “First, a two-year large bank recapitalisation plan [worth ₹2.1 lakh crore or 1.4 per cent of GDP] for State banks was announced. The details are not clear yet, but the package is likely to help address the capital shortages that have hindered the banks’ lending capacity.
GST and demonetisation
On the back of transformational reforms such as GST and demonetisation, all the three firms have noted that while short-term growth has been impacted, growth will rebound in the upcoming quarters. S&P believes that introduction of GST should spur up the economic activity in the country. “The removal of barriers to domestic trade tied to the imposition of GST should also support GDP growth,” said the firm in its report. Moody’s noted, “Most of these measures will take time for their impact to be seen, and some, such as the GST and demonetization, have undermined growth over the near term.” On similar lines, Fitch expects GDP growth to pick up in the next two years. Gradual implementation of the structural reform agenda is expected to contribute to higher growth, as will higher real disposable income.
All the three credit rating agencies have taken note of the government’s infrastructure boost through the Bharatmala project to develop and expand approximately 40,000 km of roads at an investment of Rs 6.9 lakh crore by 2022. S&P noted in its report, “Public-sector-led infrastructure investment, notably in the road sector, will also stimulate economic activity, while private consumption will remain robust.” Fitch said, “The government unveiled a substantial road construction plan [worth ₹6.9 lakh crore, or 4.5 per cent of the GDP, over a five-year horizon]. This may encourage the investment growth outlook.” On similar lines Moody’s noted, “The government is mid-way through a wide-ranging program of economic and institutional reforms. While a number of important reforms remain at the design phase, Moody’s believes that those implemented to date will advance the government’s objective of improving the business climate, enhancing productivity, stimulating foreign and domestic investment, and ultimately fostering strong and sustainable growth.”