New Delhi: Predicting a 7.6 percent growth rate for India, research firm Moody’s Analytics on Thursday warned that the economic expansion might slow down due to lack of reforms.
The economic research and analysis firm’s India forecast said that “The economy will likely expand 7.6 percent in 2015 thanks to lower interest rates. A lack of reforms could derail medium-to-long term growth prospects.”
The report, “India Outlook: Waiting for Reforms to Fuel Growth”, said that “Green shoots are slowly emerging, but the government’s failure to deliver promised reforms is the major impediment.”
Moody’s Analytics’s associate economist and author of the report Faraz Syed cited key reforms such as the land acquisition bill, flexible labor laws, and the goods and services tax (GST), which have the ability to propel India’s growth.
However, these key reform bills are still in parliament’s ambit and the government has till now failed to create a consensus to get them passed.
“Without a majority in the upper house, the ruling Bharatiya Janata Party’s power has been nullified and the opposition has blocked proposed reforms,” the report said.
On the bright side the report predicts another interest rate cut by the Reserve Bank of India (RBI) this year. The decision, it informed, will be on the back of better rains, lower commodity prices and strong external balances.
India Inc. has been demanding a rate cut as it believes that this may be the last time in this calendar year for RBI to ease lending before inflation spirals and the US Fed decides on its own rates in September.
The Indian monetary policy review by the RBI is scheduled for August 4.
“We expect at least one more benchmark rate reduction in 2015 to complement the 75 basis points already delivered this year,” the report predicted.
“Accommodative monetary policy will lift GDP to 7.6 percent in 2015, increasing to 8 percent in 2016.”
The economic research firm pointed out that tampering with the central bank’s independence would make it difficult to anchor inflation expectations and weigh on India’s economic prospects, particularly financial market stability.
Recently, the government introduced a draft financial code which proposes to clip the RBI’s wings.
The code, if implemented, will undermine RBI’s ability to rein-in inflation. This will also discourage investors from taking risks in the future as the RBI is viewed by many as an anchor for financial stability in the country.
“India’s monetary policy, with Governor Raghuram Rajan at the helm, has been effective. However, a recent draft bill could undo the RBI’s good work,” the report elaborated.
“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.”