Global rating agency Moody's said on Tuesday that there are growing concerns about the risk of policy stagnation and a sentiment of "some disappointment" over the pace of reforms introduced by the Modi-led BJP government at the centre. It also flagged the subdued rural economy as a "credit negative" for India's sovereign rating.
However, in its latest 'Inside India' report, Moody's Investors Service said the consensus view on India's economic growth prospects is relatively optimistic and in line with Moody's baseline forecast of 7.5% expansion in current fiscal.
"Forecast represents the highest projection amongst G20 economies, and provides a key pillar of support for the Baa3 sovereign rating and positive outlook," it said.
This is the lowest investment grade rating, but a 'positive' outlook indicates room for further upgrade.
But the results of latest polls conducted by it has stated "some disappointment...with regard to the pace of reform under the administration of Prime Minister Narendra Modi, and increasing concerns about the risk of policy stagnation."
"Specifically, almost half of the poll respondents identified sluggish reform momentum as the greatest risk to India's macroeconomic story."
Moody's said "the multi-party, federal democracy in India underpins a gradual pace of policy implementation" and many of the policies are positive for India's institutional strength.
However, the direct impact of growth-enhancing reforms is only likely to take full effect over a multi-year horizon, it said.
Moody's further said it expects India's weakened rural economy to remain subdued through the fiscal year ending March 2016, particularly if the risk of below-average monsoon rainfall materialises.
"A sustained soft patch for India's rural economy would weigh on private consumption and non-performing assets in the agricultural sector, (which is) a credit negative for the sovereign and banks," Moody's vice president and senior research analyst Rahul Ghosh said.
The rural income growth in India has been stuck in the mid-to-low single digits in so far this year, well off the more than 20% rates clocked in 2011.
The slower rural income growth is partly the result of increased fiscal restraint by the central government, which Moody's believes is unlikely to change in the coming quarters.
Elaborating further on policy reforms, Moody's said the plans to cut the country's corporate tax rate to 25% from the existing 30% over the next four years will be "credit positive" for all Indian corporates insofar as it will reduce their tax expenses and increase their competitiveness over the medium term.
Moody's further said India's pro-cyclical industries will benefit from improving credit conditions through the current fiscal, while the country's LNG import book was credit positive for companies like GAIL.
The public sector banks' credit profiles would improve only in the medium term, it added.