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Rating Outlook : HEALTHIER ECONOMY IN 2 YEARS, By Shivaji Sarkar, 26 Sept, 2016 Print E-mail

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.

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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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