News & Analysis

Moody’s Flag India’s Reform, Policy Barriers

The rating agency however believes that the growth in infrastructure and manufacturing could serve India’s bid to become the fastest-growing economy

At a time when the government is battling some electoral reverses, there is some good news coming from elsewhere with Moody’s Investor Service suggesting that the continued focus on infrastructure and manufacturing growth could help India become the fastest-growing economy in the world over the next few years. 

In its latest report, the global credit rating agency has also added a note of caution around reform and policy barriers that could hamper India’s continued status as an investment destination. The bureaucracy could slow down approval processes, resulting in longer duration for setting up businesses in the country, it said. 

This note of caution comes at a time when both Indonesia and Vietnam are known to have smoothened out the investment processes in order to attract funds. “Ongoing efforts by India to reduce corruption, formalize economic activity, and bolster tax collection and administration are encouraging, although there are increasing risks to the efficacy of these efforts,” it said.

The rating agency made special mention of the government’s efforts on creating the National Infrastructure Pipeline and the Atmanirbhar Bharat theme to enhance infrastructure growth in the country and create additional manufacturing chutzpah with a clear focus on exports as well as the domestic markets. 

Consumption set to grow; funding must grow too

The report said consumption is set to grow on the back of rising per capita incomes and the growing working age population that is getting added each year. Additionally, the government was spending more to drive infrastructure-related projects in steel and cement besides also seeking additional funds in the renewables sector to meet net-zero commitments. 

“Larger production capacity will raise rated companies’ competitiveness in these sectors, a credit positive if they manage execution risks with financial discipline,” Moody’s said in the report while indicating that demand across infrastructure and manufacturing will grow three to 12% for the rest of the current decade, though it would still lag behind China’s growth. 

“Rated companies in manufacturing (steel, cement, oil and gas and automotive) and infrastructure (aviation and power) sectors will increase capacity and global competitiveness, bringing economies of scale, a credit positive,” the report said adding that India’s competitive advantage in the growing services segment would hold it in a strong position going forward. 

The report also noted that multinational corporations would evince growing interest in the Indian economy as cheap mobile data would result in banks and IT services companies keeping their faith in the country for outsourcing their back-office operations. IT and knowledge process outsourcing related services would continue to benefit from lower costs, it added. 

Moody’s said that services exports grew 42% in the recent past, lowering the country’s current account deficit in 2022-23 while on the manufacturing side, the steel sector continues to remain a bright spot, though a focus on green steel would help further reduce costs and make its products more competitive globally. 

“While carbon intensive sectors such as cement, oil and gas, and steel may face decarbonisation challenges over a longer term, we still expect them to grow strongly until 2030,” Moody’s said  while noting that the private sector’s role in delivering new renewable and airport capacity continues to underscore the role of low-cost funding. 

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