Moody’s: India’s Rural Demand to Remain Soft, a Credit Negative for rated Issuers

Moody’s Investors Service expects India’s weakened rural economy to remain subdued through the fiscal year ending March 2016 (FY2016), particularly if the risk of below-average monsoon rainfall materializes.

“A sustained soft patch for India’s rural economy would weigh on private consumption and non-performing assets in the agricultural sector, a credit negative for the sovereign and banks,” says Rahul Ghosh, a Moody’s Vice President and Senior Research Analyst.

Rural income growth in India has been stuck in the mid-to-low single digits in 2015 to date, well off the 20%-plus rates clocked in 2011.

The slower rural income growth is partly the result of increased fiscal restraint by the central government, which Moody’s believes is unlikely to change in the coming quarters.

Moody’s analysis is contained in its latest edition of Inside India, a quarterly publication that looks at major credit trends in India. The publication also includes key takeaways from a number of audience polls carried out during the first annual Moody’s and ICRA India Credit Conference in Mumbai, which took place in May.

According to the poll results, the consensus view on India’s economic growth prospects is relatively optimistic, very much in keeping with Moody’s baseline scenario of headline economic expansion of 7.5% in FY2016. This forecast represents the highest projection amongst G20 economies, and provides a key pillar of support for the Baa3 sovereign rating and positive outlook.

Notwithstanding these growth expectations, our polling results pointed to some disappointment amongst the audience with regard to the pace of reform under the administration of Prime Minister Narendra Modi, and increasing concerns about the risk of policy stagnation. Specifically, almost half of the poll respondents identified sluggish reform momentum as the greatest risk to India’s macroeconomic story.

Moody’s notes that the multi-party, federal democracy in India underpins a gradual pace of policy implementation. While many of the policies are positive for India’s institutional strength, the direct impact of growth-enhancing reforms is only likely to take full effect over a multi-year horizon.

For example, plans to cut the country’s corporate tax rate to 25% from the existing 30% over the next four years will be credit positive for all Indian corporates insofar as it will reduce their tax expenses and increase their competitiveness over the medium term.

The material has been provided by InstaForex Company – www.instaforex.com

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