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Modi Govt needs to deliver on reforms, spare RBI powers; business confidence falling – Moody’s

moodyMoody’s Analytics, a division of global ratings firm Moody’s, has warned that the current government at the center needs to start delivering on its reform promises as business confidence is starting to dip. The firm also warned that meddling in Reserve Bank of India’s powers to manage interest rates could have a bearing on India’s financial stability.

“India’s political infighting is denting business confidence. Without a majority in the upper house, the ruling Bharatiya Janata Party’s power has been nullified and the opposition has blocked proposed reforms,” it said.

“If India is to catch up to global economic powerhouses such as China, reforms must be delivered swiftly… The downside of not delivering reforms will be punishing. GDP growth is not likely to rise above 7.5% if the government continues to overpromise and not deliver. Though 7.5% GDP growth appears high, it is below India’s potential.”

The Narendra Modi government has found its reforms stalled after the opposition Congress Party started negotiating with it for allowing the upper house of the Parliament to pass key legislation.

Reforms such as the land acquisition bill, flexible labour laws, and the goods and services tax have failed to pass parliament.

“Given the political seesaw, these are unlikely to be delivered until later this year or even 2016,” Moody’s Analytics said.

Passing the land acquisition bill, which curtails farmers’ right over their land, will improve India’s business environment by speeding up the conversion of land for infrastructure use, the firm said.

“Foreign firms are wary of investing in India, as lengthy delays in acquiring land tend to stall projects.”

KEEP OFF THE RBI

It also warned that tampering with the Reserve Bank of India’s powers to set interest rates will have far reaching consequences for the Indian economy.

The government has been under pressure from industry lobbies to curtail RBI’s powers and ensure that interest rates are reduced, so that they can get cheaper loans.

“Overall, India’s monetary policy, with Governor Raghuram Rajan at the helm, has been effective. Inflation has fallen, external accounts have improved, and the economy is poised for further rate cuts. However, a recent draft bill could undo the RBI’s good work,” it said.

It pointed out that the government has proposed a seven‐member monetary policy committee, including four members picked by the government, to vote on interest rate decisions. It would also remove the governor’s veto power.

“We believe that a government‐elected panel undermines the RBI’s independence. Moving to the new model would severely dent the RBI’s competency: Credibility would be lower, politics would drive decisions, and transparency would be reduced.

“Overall, we believe that tampering with the central bank’s independence would make it difficult to anchor inflation expectations. This would weigh on India’s economic prospects, particularly financial market stability.”

However, Moody’s Analytics believes that the bill is unlikely to pass parliament.

It also questioned the utility of India’s new GDP measurement method.

“The new GDP series misrepresents India’s economic environment. Changes to survey designs mean that GDP is no longer parallel with other partial demand indicators. We believe India’s true potential GDP growth rate lies somewhere near 10%.

“In particular, there are signs that not all is well for manufacturing, the key industry touted by the BJP to drive India’s growth engine.”

It also said that the Indian economy is underperforming its potential.

“The biggest hurdle is private investment,which expanded rapidly prior to the so‐‐called taper tantrum in 2013, when investors pulled out of emerging markets on expectations of Federal Reserve asset purchase tapering. However, investment rates have fallen amid stalled infrastructure projects and a rise in bad loans. A positive step higher is not likely without significant reform.”

“Lower investment is evidenced in India’s credit cycle churning slower. But some green shoots such as the return of microfinance lending are promising. Rural lending has increased over the past year, though the total amount remains small in comparison with urban lending.

And despite a lack of reform, credit growth will likely accelerate in the coming quarters thanks to lower interest rates. Commercial banks are starting to pass on the RBI’s rate cuts from earlier in the year. s rate cuts from earlier in the year. Stars align for another rate cut We believe the RBI RBI will cut interest rates again this year. There could be two more 25 will cut interest rates again this year.”

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