Moody's favourable India ratings on a cautious note

Moody's favourable India ratings on a cautious note

The short-term impact of GST reforms may not be visible, but its long-term benefits will include higher productivity growth

The Dollar Business Bureau

India according to Moody’s Investors Service is implementing extensive reforms, which if successful would gradually ease the government’s high debt burden and turn its credit profile positive.

The reforms and the financial changes that the government has introduced, would according to the Moody’s ease its high financial burdens. 

In its just-released report, titled, “Government of India: Effective Implementation of Key Fiscal and Banking Sector Reforms Would Address Core Credit Challenges.” The report focusses mainly on 3 key reforms: The Goods and Services Tax (GST), the NPA resolution measures and the Fiscal Responsibility and Budget Management Act (FRBM) Committee recommendations. 

On GST, Moody's opines that the “short-term impact of GST reforms may not be visible, but its long-term benefits will include higher productivity growth, due to efficiency gains in business operations, greater investment, as interstate tax barriers are reduced, and an expanded revenue base with enhanced tax compliance.” 

For the FRBM Committee recommendations, "The FRBM framework offers an opportunity to anchor fiscal consolidation by setting a medium-term target for the country's debt burden. Combined with higher nominal GDP growth, a credible fiscal framework that fosters fiscal responsibility at both the central and state government levels would contribute to the gradual reduction of India's high debt burden" says William Foster, a Moody's Vice President and Senior Credit Officer.

On the redressal of high NPAs ailing the banking sector, Moody's details in its report “that the recent government measures to address the high NPAs and the promulgation of the Insolvency and Bankruptcy Code 2016 are credit positive for the sovereign because they provide a clearer framework for NPA resolution. However, outstanding structural issues remain within the banking system, particularly within public sector banks, which further constrains banks' abilities to finance potential new investment and, therefore, weighs on private investment.” 

Moody's also makes note of the recent demonetization efforts taken by the government which it says could help in financial inclusion, help broaden the tax base by ushering in the previously unbanked informal sector. Recent expenditure reforms, including Direct Benefits Transfer, should improve expenditure efficiency, while the Aadhaar identification system can help reduce fiscal leakage.

The Dollar Business Bureau - Jun 02, 2017 12:00 IST