Moody’s Investors Service on Thursday said even if the new government pursues a strong reform agenda, the depth of the issues to be addressed means that India’s economy is unlikely to return to previous growth rates of around 7-8 per cent in the near future.
The global credit rating agency has forecast a growth of 4.5-5.5 per cent in 2014 and 5-6 per cent in 2015.
Moody’s said growth prospects for India are hampered by lack of reforms in recent years. The country is also vulnerable to capital outflows, given a history of sizeable current account deficits.
Although the current account deficit was reduced to only 0.3 per cent of GDP at the end of 2013, some of that narrowing is unlikely to be sustained once restrictions on gold imports are lifted, it added.
RBI may tighten further Moreover, high inflation, at more than 8 per cent in March 2014, implies that the central bank has no room to ease monetary policy in the short term and may even need to tighten further.
Like in Brazil, India’s government has only limited opportunities to provide some fiscal stimulus to offset a possible slowdown in capital flows as Moody’s expects the debt-to-GDP ratio to rise to more than 65 per cent this year.
On a positive note, according to the Institute of International Finance, portfolio flows in India increased sharply in March 2014, and, although they decreased somewhat in April, robust flows so far this year suggest that international investors continue to perceive attractive investment opportunities in India, said Moody’s.
“Some of these capital inflows may be based on expectations of reforms after the parliamentary elections. These expectations could be disappointed if a coalition government lacks the political flexibility to pass reforms,” the agency said.