India’s economic prospects face new hurdles amid falling investment, and medium and long-term growth would suffer without sufficient and quick reforms, the analytics arm of global credit rating agency Moody’s said in a report on Thursday.
It forecast that India’s GDP will grow 7.6% in 2015, but said any expansion below 10% will be below potential given India’s new controversial formula to calculate the size of the economy. India’s GDP grew 7.3% in 2014-15.
“The government’s failure to deliver promised reforms is the major impediment,” Moody's Analytics said in its latest report, “India Outlook: Waiting for Reforms to Fuel Growth”.
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The report also raised fresh questions on the state of the RBI, which is in the midst of a controversial overhaul on the governor’s powers in managing interest rates, saying any tampering with the central bank’s autonomy may hurt India’s credibility.
“Key reforms such as the land acquisition bill, flexible labour laws, and the goods and services tax have failed to pass parliament. And given the political seesaw, these are unlikely to be delivered until later this year or even 2016,” Faraz Syed, associate economist, Moody’s Analytics, said in the report.
Critical reforms measures such as the goods and services tax (GST) and the land acquisition bill have remained stuck because of a logjam in Parliament.
The Moody’s Analytics report termed these as “empty promises” mirroring the views of restive investors who want speedier reforms and easier rules to do business in India, which is set to become the world’s fastest growing major economy.
The commentary marks a turnabout in India’s image after the Narendra Modi-led BJP rode to a landslide poll victory last year promising to usher in “achche din” and drumming up expectations of investor-friendly measures.
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India’s political infighting is denting business confidence, it said, adding that without a majority in the upper house, the ruling BJP’s power has been “nullified” and the opposition has blocked proposed reforms.
Moody’s Analytics, a division of Moody's Corporation, said investment rates in India have fallen amid stalled infrastructure projects and mounting bad loans. “A positive step higher is not likely without significant reform,” it said.
India’s ability to rival neighbouring titan China would critically depend on the pace of important reforms such as the land acquisition bill which is a catalyst for investment, it said.
“Passing the bill will improve India’s business environment by speeding up the conversion of land for infrastructure use. Foreign firms are wary of investing in India, as lengthy delays in acquiring land tend to stall projects,” it said. “There are signs that all is not well for manufacturing, the key industry touted by the BJP to drive India’s growth engine.”
Moody’s Analytics warned against going ahead with the proposal to remove the RBI governor’s veto power under a proposed new monetary policy committee to decide on interest rates.
The government has proposed a seven-member monetary policy committee, including four members picked by the government, to vote on interest rate decisions. It would also remove the governor’s veto power.
The report said a government-elected panel would undermine the RBI’s independence. Moving to the new model would severely dent the RBI’s competency, it said.
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