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Loss of momentum on economic reforms could hamper investment in India: Moody’s

ParliamantMoody’s Investors Service on Wednesday cautioned that a loss of momentum on reforms may hamper investment and prove to be a ‘downside factor’ for Indian companies, even as it said most corporates will benefit from strong economic fundamentals and accommodative monetary policy.

It further said that weak global cues and an impending US rate hike may also have an impact on Indian businesses.

Moody’s said that a failure by the government in implementing key reforms such as Goods and Services Tax (GST) and land acquisition laws could hamper investment and signal a derailed reform prospect.

“A healthy 7.5 percent GDP growth for India for the fiscal year ending March 2017 and a pick-up in manufacturing activity will be broadly supportive of business growth,” Moody’s VP and Senior Credit Officer Vikas Halan said.

But despite these overall supportive domestic conditions for the country’s corporates, potential headwinds loom from a loss of reform momentum, he said.

The Modi administration so far this year has been unable to enact legislation on key reforms, including a unified goods and services tax and the Land Acquisition Bill.

“It seems highly unlikely that the major reforms will get enacted by the Upper House of Indian Parliament where the ruling coalition is in minority. A failure to implement these reforms could hamper investment amid weak global growth,” Halan added.

The ruling NDA government has said it is willing to discuss with the Congress to get the GST Bill passed in the winter session of Parliament beginning tomorrow. The passage of the Bill in the forthcoming session is essential to ensure rollout of GST from April 1, 2016.

In its 2016 outlook for Indian non-financial corporates, Moody’s said a 7.5 percent growth, easing inflation resulting in lower interest rate will lead to improving corporate cash flows and be broadly supportive of business growth.

“However, the corporates remain vulnerable to the volatile Indian rupee as against the US dollar and to low commodity prices, which has in turn led to a sharp decline in external trade,” Halan added.

The fall in commodity prices has benefited many Indian corporates given the country’s status as a net importer of raw materials and its recent history of high inflation. But low commodity prices will result in deterioration of credit metrics of metals and mining companies, it said.

The other ‘downside factors’ listed by Moody’s in its report are loss of reform momentum leading to annual GDP growth falling below 6 per cent, resulting in a deterioration of credit metrics. Also higher interest rates brought on by rising inflation and/or exchange rate volatility, resulting in a tight funding environment is a factor.

Moody’s said that the upside factors include further government measures that could sustain the GDP growth at 8 percent or more, leading to a broad-based improvement in corporate credit metrics.

Besides, improvement in the global macroeconomic environment leading to stabilising commodity prices and credit markets would be positive, it said.

Stating that loss of reform momentum remains a concern, Moody’s said: “The government is unlikely to win a majority in the upper house if it keeps losing state elections like it did recently in Delhi and Bihar. Opposition parties are unlikely to allow key reforms to go through.”

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