Growth potential higher for India in long run: William Foster

NEW DELHI:  Global ratings agency Moody’s, which recently upgraded India’s sovereign rating, asserts that its assessment was based on reforms and structural credit strengths.

They together offer greater confidence that public indebtedness, which is India’s principal credit weakness, will not rise materially even in potential downside scenarios and will eventually decline, William Foster, vice-president, Sovereign Risk Group, Moody’s Investors Service tells Sunitha Natti of Sunday Express. Excerpts:

What’s the genesis and thought-process behind the ratings upgrade, which was unexpectedly timed?

The upgrade is driven by our assessment that a number of reforms will combine to enhance India’s structural credit strengths, including its strong growth potential, improving global competitiveness and its large and stable financing base for government debt. It will take time for them to impact. Some, like GST and demonetisation, have undermined near-term growth.

However, as disruption fades, we expect to see a rebound in real and nominal GDP growth to a sustained higher levels. In turn, sustained high nominal GDP growth will likely contribute to a gradual decline in the general government debt burden over the medium-term. 

What will be the impact of reforms and from when will it start showing up?

The government is midway through a wide-ranging program of economic and institutional reforms. Our assessment of India’s credit profile integrates our analysis of the likely medium-term impact of the range of reforms being undertaken.

While some reforms remain at the design stage, those implemented to date will support India’s strong growth potential and an improving global competitiveness to enhance the economy’s shock absorption capacity. In turn, sustained strong growth and large and stable domestic savings will foster a gradual decline in India’s high debt burden over time.

Key reforms include the recently introduced GST, which will, among other things, promote productivity by removing barriers to interstate trade; improvements in the monetary policy framework, which, by anchoring inflation at moderate levels, provides greater visibility to businesses; and measures such as demonetization, the Aadhaar system of biometric accounts and Direct Benefit Transfer to reduce informality.

The recently announced bank recapitalization program, while modestly increasing the government’s debt burden, should address the overhang of NPAs and ease lending constraints thereby contributing to more robust growth.

If we look at GST in particular, its impact on government tax revenue and the broader economy will stem from potential changes in corporate decisions with regards to production, pricing and tax compliance.

Over time, GST will contribute to productivity gains and higher GDP growth by improving the ease of doing business, unifying the national market and enhancing India’s attractiveness as a foreign investment destination.

It will also support higher government revenue generation through improved tax compliance and administration. The new system should incentivise some businesses to change their business models to service a now unified national market.

When do you see the pick-up cycle taking off and why?

Private sector investment has been weak, likely hampered by high corporate debt in investment-intensive sectors and ongoing challenges in the business environment and infrastructure gaps. Over time, measures implemented and planned, such as GST, removing barriers to trade within India, steps aimed at enhancing the business environment, encouraging FDI, and providing greater visibility about future inflation will contribute to higher investment. Most of these measures will take time for their impact to be seen.

What’s the future roadmap for Indian economy?

Longer term, India’s growth potential is significantly higher than most other Baa-rated sovereigns. As income levels continue to rise, the range of reforms aimed at improving the business environment, increasing formalization of the economy and anchoring stable inflation will contribute to enhancing India’s structural credit strengths and improve the economy’s capacity to absorb shocks.

In the near-term, we have revised our GDP growth forecast down to take into account the immediate impact of demonetisation and disruptions related to GST implementation. We forecast real GDP growth to moderate to 6.7% in FY18. However, as disruption fades, we expect to see a rebound in real GDP growth to 7.5% in the next fiscal year and remain around that level thereafter.

What’s your take on the country’s fiscal metrics and the outlook for the general government fiscal consolidation drive?

We forecast a general government budget deficit, which combines both the central and state government deficits, of 6.5% of GDP this fiscal year. Lower government revenues than planned in the budget and somewhat higher government spending could lead to a deficit somewhat wider than targeted, which we capture in our forecast.

However, we think that the government’s commitment to fiscal consolidation remains. Over time, measures aimed at broadening the tax base and improving the efficiency of government spending will contribute to a gradual narrowing of the deficit. Together with robust and sustained nominal GDP growth, this should help to contribute to a gradual decline in the government debt burden over the medium term.