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Global Credit Research - 15 Jan 2017
New York, January 15, 2017 -- Moody's Investors Service and its Indian affiliate, ICRA Limited,
say that India (rated Baa3 positive by Moody's) will remain one
of the fastest growing major economies globally in 2017, although
GDP growth will moderate in the first half of the year, as the economy
adjusts after demonetization. Moody's also believes that
the government will likely achieve its fiscal deficit target of 3.5%
of GDP for the current fiscal year ending 31 March 2017.
ICRA expects the country's growth of gross value added at basic
prices to remain healthy in 2017, although such growth will ease
somewhat to about 6.6% from around 7.0% in
2016, with a likely pick-up in H2 2017.
"Even after the currency in circulation is replenished, we
expect that India's economic growth will stabilize with a lag,
while remaining strong," says Aditi Nayar, an ICRA Principal
Economist. "The adjustment and recovery period could stretch
to as much as 2-3 quarters for certain sectors."
ICRA says that the focus on digital transactions and the introduction
of a goods and services tax (GST) will likely reduce the competitiveness
of the unorganised sector. ICRA therefore anticipates a relatively
healthier expansion of the organised sectors in 2017, at the cost
of the unorganised sectors.
ICRA further points out that the low agricultural growth in H1 2016,
as well as healthy reservoir levels on a seasonally adjusted basis,
will support the pace of expansion of agricultural output in the first
half of 2017. But agricultural growth in subsequent quarters will
be influenced by various factors, the most important being the magnitude
and dispersion of monsoon rainfall.
ICRA also says that the loss of incomes in some sectors and deferral of
consumption are likely to weigh on capacity utilization, delaying
the capacity expansion plans of the private sector. And,
the extent of capital spending budgeted by the central and state governments
for the fiscal year ending 31 March 2018 will affect the extent to which
infrastructure spending can stimulate growth in a non-inflationary
"Nevertheless, economic and institutional reforms already
introduced and potentially forthcoming, continue to offer a reasonable
expectation that India's growth will outperform that of its similarly
rated peers over the medium term, and that the country will achieve
further improvements in its macroeconomic and institutional profile,"
says William Foster, a Moody's Vice President and Senior Credit
Moody's and ICRA point out that after a temporary dampening effect
on consumption and investment in the medium term, demonetization
will likely strengthen India's institutional framework — by reducing
tax avoidance and corruption — and should support efficiency gains
through a greater formalization of economic and financial activity.
Moody's also points out that in an environment of lackluster global
trade, and with economies globally facing the increasing risk of
protectionism, India's very large domestic markets provide a relative
competitive advantage when compared to smaller and more trade-reliant
On the fiscal front, Moody's says that the government will
likely remain committed to achieving its fiscal deficit target of 3.5%
of GDP for the fiscal year ending 31 March 2017. However,
room to reduce the deficit further to the target of 3.0%
of GDP in the following year will be limited, due to the need for
increased infrastructure spending and higher government salaries.
The government announced its intention to increase public capital expenditure
in the last budget to help reduce supply-side bottlenecks and stimulate
growth. Meanwhile, wages and salaries account for about 50%
of total fiscal expenditure, with a large, one in 10-year
increase in central government compensation just implemented. Moody's
expects that the government will renew its commitment to increase capital
spending and address the short-term disruptive impact of demonetization,
during its budget speech on 1 February 2017.
Moody's explains that the implementation of the pending GST and
other measures aimed at enhancing income declarations and tax collection
will help widen India's tax base and boost revenues. However,
such a boost will only materialize over time, with the magnitude
uncertain at this point.
As a result, the general government deficit will remain sizeable,
and any reduction in India's government debt burden will largely rely
on robust nominal GDP growth. Moody's expects that India's
debt-to-GDP will hover around the current levels (at 68.6%
in 2015) before falling gradually, as nominal GDP growth is sustained
and revenue-broadening and expenditure efficiency-enhancing
measures take effect.
On the issue of average CPI inflation, ICRA says that the rate will
soften to 4.5% in 2017 from 4.9% in 2016,
although the readings will continue to register month-to-month
volatility. Key factors that will dominate CPI inflation in 2017
include monsoon dynamics, the impact of the GST on prices of various
goods and services, commodity price movements, and the INR-USD
ICRA says that based on the minutes of the Monetary Policy Committee's
December 2016 meeting — which revealed a renewed emphasis of some
members on achieving the mid-point of the inflation target range
of 4% — the room for incremental repo rate cuts will prove
limited, at 25 basis points over the next six months.
This publication does not announce a credit rating action. For
any credit ratings referenced in this publication, please see the
ratings tab on the issuer/entity page on www.moodys.com
for the most updated credit rating action information and rating history.
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Investors Service, Inc.
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