Rein in hotheads: Moody’s

Credit rating agency Moody’s has warned Prime Minister Narendra Modi to keep a check on the hot heads in his party or risk “losing domestic and global credibility”.

This is first comment by an international agency on the recent beef and other political controversies in the country. The Modi government is already facing protests from a segment of writers, historians, artists and scientists over alleged “growing intolerance” in the country.

Moody’s Analytics, the economic research and analysis division of Moody’s Corporation said that the BJP does not have a majority in the upper house to pass crucial reforms and has been met with an obstructionist opposition.

“But in recent times, the government also hasn’t helped itself, with controversial comments from various BJP members. While Modi has largely distanced himself from the nationalist gibes, the belligerent provocation of various Indian minorities has raised ethnic tensions,” said Moody’s Analytics in a report titled India Outlook: Searching for Potential.

It noted that along with a possible increase in violence, the government will face stiffer opposition in the upper house as debate turns away from economic policy.

“Modi must keep his members in check or risk losing domestic and global credibility,” said Moody’s.

Moody’s Analytics is different from Moody’s Investors Service Inc, the credit ratings agency which is also a subsidiary of Moody’s Corporation.

Moody’s Analytics said that state election in Bihar could prove pivotal to Mr Modi’s leadership.

“Overall, it’s unclear whether India can deliver the promised reforms and hit its growth potential. Undoubtedly, numerous political outcomes will dictate the extent of success,” it said.

The report said that “consistent failure to deliver key economic reforms has faded the optimism. While global market sentiment has been down, Indian equities have also suffered from a loss in domestic sentiment,” said Moody’s Analytics.

It pointed out that Sensex has fallen around 11 per cent since the euphoria behind the new government propelled the stock market.

“There are also indications that investors have been less optimistic about India’s economic prospects. Net financial flows into equity were around $16 billion in 2014. However, they are unlikely to reach those highs this year. The same can be said about financial flows into India’s debt market,” said the report.

The report said that the Indian economy is likely to grow around 7.3 per cent in the September quarter and “remains below potential, which we believe is around 9 percent to 10 per cent.” But closing India’s negative output gap is difficult: external headwinds are blowing stronger, and “the government has failed to deliver promised reforms”, it said.

Moody’s said that GDP will grow at 7.6 per cent this year and in 2016 and that key economic reforms could deliver greater potential GDP, as they would improve India’s productive capacity.

It noted that the Reserve Bank kick-started the recovery by cutting the repo rate by 125 basis points this year but monetary transmission broke down as commercial banks passed only one-third of those cuts to customers.

But positive signs are emerging as SBI had reduced its base lending rate earlier this month.

Moody’s said capacity utilisation has been low across Indian industries this year. The capital expenditure pipeline is running dry. However, interest rate cuts should encourage investment, as will the softer inflation profile, it added.