Moody’s Investors Service has said investment levels in India (Baa3 positive) are showing nascent signs of recovery, driven by an upturn in the capital replacement cycle, and increased public sector expenditure.
“Recent high-frequency data show that India's investment cycle is starting to pick up,” said Rahul Ghosh, a Moody’s Vice-President and Senior Research Analyst. “However, a revival in private-sector capital expenditure will be required to sustain the recovery in investment activity, because India’s weak fiscal position will limit the ability of the government to further expand public sector-led investment.”
Ghosh also said a broad-based and sustainable revival in the private sector capital expenditure cycle will likely take longer to materialise, given the high debt levels in the non-financial corporate sector, asset quality concerns in the banking sector, and subdued external demand.
Moody’s analysis is contained in its latest edition of
On the 2016 outlook for non-financial corporates, Moody’s said strong domestic growth in India will offset global headwinds.
In particular, a healthy 7.5 per cent domestic GDP growth for fiscal 2017 and a pick-up in manufacturing activity will be broadly supportive of business growth for non-financial corporates.
Rupee volatility But, corporates remain vulnerable to volatility in the rupee against the US dollar.
Additionally, Moody’s said lower commodity prices have benefited many Indian corporates, given the country’s status as a net importer of raw materials, and its recent history of high inflation. The resultant moderating pace of inflation should result in lower borrowing costs for corporates and lower yields on corporate bonds.
But, despite these overall supportive domestic conditions for corporates, potential headwinds loom from a loss of reform momentum.
Moody’s points out that the Modi administration has not enacted legislation on key reforms so far this year, including the GST Bill and the Land Acquisition Bill.