Economic Highlight
New
Delhi, 26 September 2016
Rating Outlook
HEALTHIER ECONOMY IN 2 YEARS
By Shivaji Sarkar
After a long time, amid slow recovery, international rating
agencies have started seeing strength in the Indian economy. The view is the
BJP-led NDA government is possibly breaking from the past and is in a position
to put the economy back on track.
The improvement, Moody’s and Morgan Stanley say, might be
visible in less than two years. They also indicate that they are prepared to
change India’s
rating. The strength they see in the economy is because of a positive policy
approach of the Modi government.
India has a good chance of
outperforming other emerging markets in the next one year as the economy is on
the verge of strong recovery, says Ridham Desai, Managing Director, Morgan
Stanley India.
He says India's
relative dividend yield is best in terms of valuation, while our fiscal and
monetary policy in terms of flexibility is superior among all emerging markets.
]
“The GST will have a positive impact on growth and tax revenues over the
medium term, supporting the sovereign's credit profile’, Moody’s stated while
counting other positives. It was a bit skeptical about immediately changing the
rating though it says in the course of time, it feels, it would improve.
The
Finance Ministry has raised objection over Moody’s methodology and its concern
may well be genuine. One, however, needs to see the change in the outlook that
is more positive now than sometime back. This needs to be seen as the strength
that is likely to pave the way for future growth. It certainly indicates a
break from the past UPA regime. Overall, the rating agencies are not gloomy as
they were two years ago.
Despite
severe problems that afflict the banking sector, Moody’s note that banks are
moving past the worst of their asset quality and the outlook is likely to be
stable over the next 12 to 18 months. The banks indeed do have problems. The
gross NPAs – loans that turn unproductive - of 12 banks are crossing 10 per
cent. The positive is that as more credit is being given, the chances of
recovery are likely to improve. Moreover, falling inflation has allowed banks
to cut the interest that they pay to their depositors while not cutting the
rates they charge to their borrowers: fatter margins will generate the profits
needed to provide for bad loans. Besides, the Government is shaking up top
management and has readied a bankruptcy reform that would make it easier to
foreclose.
It
certainly is a difficult situation. Having
inherited a messy economy, it is not easy to put it back on track. But
the recent results of the companies indicate the positive though their
performance in financial terms is stated as less than ordinary.
India is
trying to massively build out its productive capacity. Its growth remains one
of the best in the world at near 7.5 per cent. The fact that India is
growing despite its banking problems only exemplifies that how it could
accelerate as the problems are addressed. Bank lending is bound to pick up for
two reasons. The balance sheet of banks are to improve as corporate capital
demand intensifies with likely growth in manufacturing as the demand is
indicated to increase with better kharif crop in the wake of a good monsoon.
A
significant aspect is that over 7 per cent growth comes without financial
exuberance. Once that happens it is likely to grow faster. A change in the
outlook of FIIs is likely.
The
recent indications from China
also hint at a turnover in India.
The Chinese government newspaper Global Times says that China has started to feel the heat of Modi’s
“Make in India”
and hosts of other programmes. The new moves have made many Chinese companies
to shift their manufacturing base to India. Recently, some of the smart
phone producers have announced shifting manufacturing to India.
The
Chinese industry finds the competition from India hotting up. Beijing is also facing a major problem of
rise in production expenses. The wages itself firmed up by 10.6 per cent since
2008 and are likely to rise. The newspapers notes that production costs now are
more favourable for India.
Wages have risen by 0.2 per cent during the past eight years. Comparatively
cheaper labour and initiatives of the NDA government on various industrial
fronts, including easier finance for startups and other corporate, are creating
difficulties for Chinese manufacturers.
The
Global Times states that the Chinese industry has to reduce its dependence on
government doles and investments. There is also concern over development.
Though Beijing
is developing its infrastructure such as roads and flyovers at a faster pace,
its overall economy is slowing down. Government investments in these sectors
are causing a drain on the economy. It also notes that the quality of such
projects are also not as per standards. In many cases, the concept of projects
has been questioned. Some roads built to ease traffic congestion have failed to
achieve the objective, while many others are located in places which remain
underutilised. The Chinese public sector has come under severe debt strain.
Even its railways and other units are unable to service the debt.
A major objective of India’s foreign relations has been to leverage
international partnerships to advance India’s domestic development. This
includes improving technological access, sourcing capital, adopting best practices,
gaining market access, and securing natural resources. Greenfield
foreign direct investment (FDI) has already seen
a jump – with India
surpassing China.
Some new international collaborative efforts, such as Japan’s low-cost loan for a high-speed rail
line, have immense potential, like the high-profile Indian metro and airport projects .
The recently amended
tax treaty with Mauritius is
but one example of how diplomacy can be used to benefit both investors and the government,
and potentially increase India’s
tax base. The extension of lines of credit to Africa and Iran promises
to increase business opportunities for Indian firms. And securing buy-in form some US silicon valley corporations securing in
increasing Internet access in India
marks another effort at advancing national development. Thus, what the rating
agencies are viewing needs to been seen in a positive perspective. Indian
economy has the strength and would change for the better.---INFA
(Copyright, India
News & Feature Alliance)
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