The Hindu Business Line : Moody’s sees slowing of GDP growth to 7.7% this fiscal

Moody’s Investor Services foresees India’s gross domestic product (GDP) growth rate to slow from 8.7 per cent in fiscal 2007-08 to 7.7 per cent in the current fiscal.

This is in contrast to the latest assessment by the Chairman of the Economic Advisory Council to the Prime Minister, Dr. C. Rangarajan, when he said that GDP growth would hover in 8-8.5 per cent range this fiscal.

In its latest annual report released on Wednesday, the widely used sources for credit rating, research and risk analysis by investors across the world, Moody’s said that despite a worsening global milieu and softer domestic economic conditions, the outlook on the foreign and local currency government ratings for India is stable.

India’s foreign currency sovereign bond rating of Baa3 reflects the Government’s low external debt and the country’s robust external payments capacity that compare favourably with most Baa-rated countries.

It said external fundamentals remain robust enough to withstand “a wide range of potential shocks, such as sudden reversals in short-tem capital flows, a sharp slowdown in global growth, as well as weak government finances or a slowdown in structural reforms on account of coalition politics”.

External fundamentals

Structural factors that bolster the rating include a private-sector induced upturn in savings and investment and a rising rate of potential growth.

India’s Ba2 local-currency bond rating is one of the few instances where Moody’s has opened a gap between the foreign and local currency bond ratings in favour of the former. This implicitly recognises the low likelihood of any spillovers of domestic fiscal problems onto the government’s stronger external balance sheet (due to regulatory and capital account restrictions) as well as improved financial sector soundness and further strengthening of the country’s external balance sheet.

Moody’s assessment of a one percentage decline in GDP anticipated for the current fiscal stems from a medley of factors, the chief ones being prolonged monetary tightening and a weaker global environment stating that the Reserve Bank of India’s monetary tightening and stricter oversight of bank lending led to the containment of inflation to within 5 per cent and a cooling of consumer and property lending through 2007.

Capital inflows

Moody’s said the central bank’s monetary tasks have been complicated by “a surge in foreign capital inflows that has caused the monetary base to grow by 22 per cent, far above its 18 per cent year-on-year broad money growth target”. Besides, the supply side constraints have also exacerbated RBI’s policy manoeuvring elbowroom.

Moody’s has stated that in the absence of higher absorptive capacities within the economy, it was always of the view that the RBI’s dilemma could lead to a prolonged tightening bias in its monetary policy.

The central bank’s response to large capital inflows has consisted of allowing some rupee appreciation, raising the issue limit of Monetary Stabilisation Scheme (MSS) to over 5 per cent of GDP and hiking banks’ reserve requirements by 350 basis points since January 2007 to mop up excess liquidity from the financial system.

While extensive MSS issuance is slowing down the reduction of the Government’s debt burden, the objective of restraining inflation and maintaining a competitive exchange rate with additional task of ensuring high rates of foreign investment and capital formation is growing notably more difficult, it said.

Off-budget liabilities

Moody’s also noted that on account of supplemental oil, food and fertiliser subsidies, several sizable fiscal liabilities have been accrued but kept off-budget by the Union Government. These accumulated off-budget liabilities would need additional market financing to the tune of nearly one per cent of GDP in fiscal 2008-09.

“At a time of decelerating economic growth (and sustained oil price shocks), these subsidies would slow down reductions in the Government’s debt burden,” it warned.

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