Debt continues to be key constraint for India, Moody's says

A day after India posted a drop in its fourth quarter ended March 31, 2017 GDP growth (6.1%), Moody's Investors Services said that debt burden continues to be a key constraint in the country's credit profile. 

Moody's said, "India (Baa3 positive) is implementing a number of wide-ranging reforms and measures that, if effective, will broaden the tax base and anchor fiscal consolidation. Under such outcomes, the government's debt burden, a key constraint on India's credit profile, would ease gradually."

Ministry of Statistics and Programme Implementation, on Wednesday, said that India's gross domestic product rose 6.1% in the fourth quarter, the slowest in the past year. Although, India's GDP growth for the last fiscal met expectations of 7.1% growth. 

The goverment introduced new series of wholesale price (WPI) and factory output (IIP) with base year of 2011-12 as against 2004-05 earlier. This led to revision in past years' GDP data. The revised data show tha India's GDP grew at 8% in 2015-16 ass against 7.9% earlier. 

On Wednesday, the government also said that India's fiscal deficit for the financial year gone by met the targetted 3.5% of the GDP. 

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"Fiscal deficit is 3.51% of GDP or Rs 5.35 lakh crore in 2016-17," the Controller General of Accounts (CGA) said while releasing the provisional accounts for the last financial year. 

For 2017-18, the government aims to further bring down the fiscal deficit -- the gap between expenditure and revenue -- to 3.2 per cent.

However, impact of demonetisation was clearly seen on GDP numbers of the fourth quarter which stood at 6.1% as against analyst and experts' expectations of over 7%. 

Moody's continue to remain positive on the net effect of demonetisation and said, "Using information collected from demonetisation and financial inclusion efforts will also help broaden the tax base by ushering in the previously unbanked informal sector."

With Goods and Services tax (GST) ready to be rolled out from July 1, 2017, many expect growth to take further hit as the first few months of the new taxation system is likely to cause some issues before things settle down. 

Under the new GST system, tax rates have been kept at 0%, 5%, 12%, 18% and 28%. 

Moody's said, "The GST is likely to take effect on 1 July 2017. The long-term benefits will include higher productivity growth, due to efficiency gains in business operations, greater investment as interstate tax barriers are reduced, enhanced tax compliance and an expanded revenue base."

On India's banking sector problems, Moody's said, "Recent government measures to address NPAs and the promulgation of the Insolvency and Bankruptcy Code 2016 are credit positive for the sovereign, as they provide a clearer framework for NPA resolution. However, outstanding structural issues remain within public sector undertakings (PSUs). Until NPAs are resolved, banks' ability to finance potential investment will be constrained."