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Business News/ Politics / Policy/  Delay in reforms to hurt India’s growth prospects, says Moody’s
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Delay in reforms to hurt India’s growth prospects, says Moody’s

Moody's says political logjam hurting business confidence; new GDP series misrepresenting economic environment

The repeated disruptions in the first two weeks of the monsoon session of Parliament has not only blocked the economic agenda of the NDA government, but also made it the least productive session in the 14 months since the NDA came to power. Photo: HT Premium
The repeated disruptions in the first two weeks of the monsoon session of Parliament has not only blocked the economic agenda of the NDA government, but also made it the least productive session in the 14 months since the NDA came to power. Photo: HT

New Delhi: The government’s inability to push through key legislative reforms, such as the land acquisition bill, flexible labour laws and the goods and services tax (GST) bill, will hurt India’s medium-to-long-term growth prospects, said Moody’s Analytics Inc. on Thursday.

In its India outlook report, titled Waiting for Reforms to Fuel Growth, economics researcher Moody’s Analytics said India’s political infighting is denting business confidence and could punish growth if the government continues to over-promise and not deliver. “Without a majority in the upper house, the ruling Bharatiya Janata Party’s (BJP) power has been nullified, and the opposition has blocked proposed reforms. Key reform such as the land acquisition bill, flexible labour laws, and the GST have failed to pass Parliament. And given the political seesaw, these are unlikely to be delivered until later this year or even 2016," the report said.

The repeated disruptions in the first two weeks of the monsoon session of Parliament has not only blocked the economic agenda of the National Democratic Alliance (NDA) government, but also made it the least productive session in 14 months since the NDA came to power.

The opposition, led by the Congress, has been demanding the resignation of external affairs minister Sushma Swaraj, Rajasthan chief minister Vasundhara Raje and Madhya Pradesh chief minister Shivraj Singh Chouhan on graft charges.

Moody’s Analytics said if India is to catch up to global economic powerhouses like China, reforms must be delivered swiftly.

“The reforms can accelerate growth and improve prospects, particularly in emerging market economies. Growth has been above par after reforms in the Philippines, Malaysia and Poland. And reforms have improved prospects and attractiveness in Mexico, Chile, Colombia and Peru. In many cases, the reforms have pushed for better governance or revenue bases, and have improved infrastructure and lowered fuel subsidies. This is similar to what India is aiming to achieve," it added.

The research arm of Moody’s Corp. said that subpar economic growth and the number of supply-side developments, such as low inflation, expected shorter rainfall deficit, lower commodity prices and stronger external balance situation, justifies two more rate cuts of 25 basis points each by Reserve Bank of India (RBI).

“We expect at least one more benchmark rate reduction in 2015 to complement the 75 basis points already delivered this year. Accommodative monetary policy will lift the GDP (gross domestic product) to 7.6% in 2015, increasing to 8% in 2016," the report said.

However, Moody’s pointed out that India’s true potential GDP growth lies somewhere near 10%, even though 7.5% GDP growth appears high.

Moody’s Analytics said that the new GDP series misrepresents India’s economic environment, and the changes to survey designs mean that the GDP is no longer parallel with other partial demand indicators in the country, such as manufacturing.

“There are signs that not all is well for manufacturing, the key industry touted by the BJP to drive India’s growth engine. And manufacturing is not the only industry suffering: Purchasing Managers’ Indexes (PMI) have dropped for both manufacturing and services in the past several months. The reform vacuum is largely to blame," it said.

Though lower investment is evidenced in India’s credit cycle churning slower, Moody’s said some green shoots, such as the return of microfinance lending, are promising.

“Rural lending has increased over the past year, though total amount remains small in comparison with urban lending. And despite a lack of reform, credit growth will likely accelerate in the coming quarters thanks to lower interest rates. Commercial banks are starting to pass on the RBI’s rate cuts from earlier in the year," it added.

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Published: 30 Jul 2015, 11:11 AM IST
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