Bold reforms needed for 6-7% GDP growth: Ratings agencies

New Delhi: Pitching for bold reforms, two top global rating agencies Monday said the government needs to effectively implement its macro-economic and structural reform agenda for growing between 6-7 percent in coming years.

They, however, asserted that India remains better placed than other emerging economies across the world on various parameters.

While placing India above its emerging market peers in terms of GDP growth, savings and investment rates, Moody's said that the country's high economic strength is a key source of sovereign credit support.

Fitch, on the other hand, said that India would be the only BRIC (Brazil, Russia, India and China) country where growth picks up in 2014 to 5.6 percent and accelerates to 6.5 percent in 2015 and 6.8 percent in 2016, owing to the government's reforms to the business environment.

As per Moody's Investors Service Report, the outlook for India's rating would improve if fiscal, inflation and infrastructure metrics get better.

"India's Baa3 government bond rating balances the strong growth potential of its large and diverse economy against high fiscal deficits, recurrent inflationary pressures, as well as regulatory and infrastructure constraints on competitiveness," it said.

The stable outlook on the rating is based on an expectation that Indian authorities will continue with policy efforts to improve the macro-economic balance and address structural constraints on growth, it said.

The report said that "the outlook for India's rating would improve if fiscal, inflation and infrastructure metrics were to move closer to Baa median scores."

On the other hand, the outlook would weaken with a further deterioration in the fiscal position, or rising contingent liabilities from the state-owned banking sector, or a material decline in foreign exchange reserves coverage of external debt and imports.

Although growth slowed significantly between 2011 and 2014, Moody's expects it to accelerate from between 5 percent and 6 percent over the next year to above 7 percent thereafter, if global economic and financial conditions remain benign and the government effectively implements its macro-economic and structural reform agenda, it said.

Although inflation has declined in recent months, India's inflation levels are high compared to rating peers.

The report pointed to recurrent inflation, regulatory complexity and weak infrastructure as constraints on the rating that reflect institutional challenges.

Recent policy measures announced by government and the central bank to address the challenges would enhance India's operating environment and improve competitiveness, Moody's added.

India's fiscal deficits averaged 7.5 percent of GDP over the last five years, it said adding, high government deficits raise domestic borrowing costs and thus increase the private sector's reliance on external borrowing.

"In 2013, India's fiscal metrics were weaker than those of any other Baa-rated country, and its inflation rate was higher than all but one Baa-rated country," the report said.

In its Global Economic Outlook report, Fitch Ratings said that India's economic growth rate will accelerate to 6.5 percent in 2015 and further to 6.8 percent in 2016 on account of reforms.

On RBI's monetary policy, Fitch said policy might become more accommodative in 2015 as a reaction to lower inflation, which would support GDP growth.

"A new monetary policy framework resulting from discussions between government and RBI could contribute to a credible low inflation environment in the future," it said.

Fitch said the global growth is uneven, but it will strengthen in 2015 and 2016.

It said the world recovery is increasingly dependent on the US growth engine, adding "A buoyant US economy is the main engine of global growth, while the recovery continues to falter in the eurozone, Japan and many large emerging markets."