India's true potential of GDP growth rate lies somewhere near 10%: Moody's


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Jun 17, 2009
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India's true potential of GDP growth rate lies somewhere near 10%: Moody's
NEW DELHI: "India's negative output gap is showing little signs of closing in 2015. Though the economy has been in a cyclical upswing since late 2014, it has failed to gain broader momentum, global rating firm," Moody's said in a report.

"Green shoots are slowly emerging, but the government's failure to deliver promised reforms is the major impediment. India's political infighting is denting business confidence," says the Moody's report authored by Faraz Syed.

"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," he added.

He further added that key reforms such as the land acquisition bill, flexible labour laws, and the goods and services tax have failed to pass parliament. And given the political seesaw, these are unlikely to be delivered until later this year or even 2016.

The land acquisition bill is a catalyst to investment. Passing the bill will improve India's business environment by speeding up the conversion of land for infrastructure use, highlighted the report.

Foreign firms are wary of investing in India, as lengthy delays in acquiring land tend to stall projects. If India is to catch up to global economic powerhouses such as China, reforms must be delivered swiftly.

The downside of not delivering reforms will be punishing, said the Moody's report. The rating agency is of the view that GDP growth is not likely to rise above 7.5% if the government continues to overpromise and not deliver.

Though 7.5% GDP growth appears high, it is below India's potential. The new GDP series misrepresents India's economic environment. Moody's believe that India's true potential of GDP growth rate lies somewhere near 10%.

In particular, there are signs that not all is well for manufacturing, the key industry touted by the BJP to drive India's growth engine.

Rate cut in offing

Moody's believe that the RBI will cut interest rates again this year. There could be two more 25 basis point rate cuts in 2015. Sub-par economic growth justifies interest rate cuts on the demand side.

First, the RBI rate cycle depends heavily on monsoon seasonal rains. Lower than average rainfalls tend to spike food inflation, but the rainfall deficit this season has not been as large as previously expected.

Second, oil prices have tumbled in the past month on the advent of the Iran nuclear deal, which should increase oil supply next year. The decline in commodity prices in general has given the RBI room to cut interest rates, added the report.

Once the reforms of Modi Govt. and infrastructure projects kick start along with manufacturing base that is developing Indian GDP will hit the double digits soon !

Target should be 12 to 14 % for the next 3 to 4 decades, India should remain young and India needs more kids!!

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