Moody's Trims Growth Forecast

Moody's Investors Service has cut India's growth estimate for the current year to around 7% from 7.5%, citing a below-average monsoon and concerns about reforms stalling, in apparent contradiction of the government's recent optimism and adding to pressure on the central bank to cut rates to improve consumer sentiment and shore up the economy . “We have revised our (India) GDP growth forecast down to around 7% in light of a drier-than-average monsoon although rainfall was not as low as feared at the start of the season,“ it said.
In the longer term, Moody's expects a recovery -it retained the 7.5% forecast for next year in its Global Macro Outlook 2015-16.That's in contrast with its expectation for China, which has been wrestling with a slowing economy . Moody's pegs China growth at 6.8% in the current year and 6.5% in the next.
Lack of progress on policy changes by the Indian government is a key challenge.
“One main risk to our forecast is that the pace of reforms slows significantly as consensus behind the need for reform weakens once the least controversial aspects of the government's plan have been implemented,“ Moody's said, echoing rising concerns after the government failed to get the goods & services tax (GST) Bill passed in Parliament.
Speaking in Parliament earlier this month, Finance Minister Arun Jaitley had referred to some green shoots of recovery becoming visible, citing rising revenue collections.
Other numbers have also been favourable. With GDP (gross domestic product) having grown 7.3% in FY15, some of the latest data such as the purchasing managers' index (PMI), car sales and industrial growth have suggested acceleration in India's economic expansion.
The government expects the economy to grow more than 8% in the current year. In any case, lower-than-expected inflation has opened up the space for interest rate cuts even before the next central bank monetary policy review scheduled for September 29. Consumer price inflation was 3.8% in July , well below the Reserve Bank of India's January 2016 target of 6%.
The rating company has a `positive' outlook on India's rating of Baa3, which is its lowest investment grade.
The monsoon rainfall deficit has widened to 10% amid the El Nino weather phenomenon tightening its grip, the India Meteorological Department said on Monday , raising fears of the first drought in six years. India's farmers depend on the June-September monsoon for most of their irrigation. After steady downpours in the early part of the season raised hope that forecasts of a rain-deficient monsoon would be proven wrong, these have dwindled worryingly in parts of India, which could in turn lead to pressure on food prices.
Moody's does expect the government to be able to make progress on its economic-change programme eventually, thereby lifting growth.
“Economic activity will continue to strengthen on the back of a gradual implementation of reforms that foster domestic and foreign investment,“ the report said, adding that an accommodative fiscal policy will also support growth in FY16. The government has front-loaded capital spending in a bid to spur investment activity until the private sector steps in.
As a net importer of commodities, the report said India has benefitted from the fall in prices over the past year but added that it is also affected by demand from China and, more generally, slower global trade growth. India's exports have fallen nine months in a row to July.
The rating company warned of risks to global growth from Chinese asset price deflation, a US rate increase and Greece's possible exit from the euro, but retained its G20 growth forecast of 2.7% for the current year and 3% for 2016, almost unchanged from 2.9% in 2014.

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