New Delhi: Referring to the 'ethnic tensions' in the wake of controversies over beef and other issues, Moody's on Friday said that Prime Minister Narendra Modi must keep BJP members in check or risk losing "losing domestic and global credibility".
Stating that BJP does not have a majority in Rajya Sabha to pass crucial reforms and the Opposition was being 'obstructionist', Moody's Analytics said in a report that the government has also not helped itself in recent times with
controversial comments from various BJP members.
"While Modi has largely distanced himself from the nationalist jibes, the belligerent provocation of various Indian minorities has raised ethnic tensions.
"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," the report said. The comments from Moody's Analytics, the economic research and analysis division of Moody's Corporation, are the first by any major global institution over the recent political controversies in India.
Moody's Analytics, however, said "its commentary is independent and does not reflect the opinions of Moody's Investors Service Inc, the credit ratings agency which is also a subsidiary of Moody's Corporation".
The report titled 'India Outlook: Searching for Potential' further said that the ongoing assembly elections in Bihar could "prove pivotal to Modi's leadership".
"The BJP is not the incumbent (in Bihar), so a win here would help secure an upper house majority... Overall, it is unclear whether India can deliver the promised reforms and hit its growth potential. Undoubtedly, numerous political outcomes
will dictate the extent of success," it added.
Moody's projected India's GDP growth for September quarter at 7.3 per cent, while for the full fiscal it would be 7.6 per cent.
It, however, cautioned that Indian equities have also suffered from a loss in domestic sentiments and the failure to deliver on key reforms has faded the optimism.
"The Sensex has fallen around 11 per cent since the euphoria behind the new government propelled the stock market. But consistent failure to deliver key economic reforms has faded the optimism," the report said.
"Key economic reforms could deliver greater potential GDP, as they would improve India's productive capacity. These include the land acquisition bill, a national goods and service tax, and revamped labour laws. They are unlikely to pass through Parliament in 2015, but there is an even chance of success in 2016," Moody's said.
"Looking beyond the business cycle, the government's reform agenda needs attention to achieve long-term growth. Prime Minister Narendra Modi's right-leaning Bharatiya Janata Party does not have a majority in the upper house to pass crucial reforms and has been met with an obstructionist opposition," it added.
On interest rates, it said low rates will buttress the economy in the short-term but reforms are needed to reach long-term potential growth.
"Capacity utilisation has been low across 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.
Moody's Analytics also projected that the RBI may keep rates on hold for the remainder of 2015, with a small chance of another cut early next year.
On the impending US rate hike, it said: "The rupee will likely come out relatively unscathed thanks to the RBI's bulging foreign exchange reserves stockpile."
The slowdown in global growth will prove a major headwind for Indian exporters, Moody's said, adding that the fall in
exports from 2015 is expected to continue in 2016.
"The newfound stability in India's current account balance could come under renewed stress if global growth slows more. So far, lower oil prices have buttressed the trade balance. But a rebound in prices if oil supply rebalances could see the trade balance deteriorate," Moody's said.
It further said there are indications that investors have been less optimistic about India's economic prospects. Net financial flows into equity were around USD 16 billion in 2014, but they are unlikely to reach those highs this year. The same can be said about financial flows into India's debt market, it added.
RBI is consistently looking to improve banking and financial structures, Moody's said.
"We believe a move towards full capital account liberalisation is inevitable in India. This will likely occur in the next two to four years.
"A freer capital account will give Indian companies greater access to overseas markets, lower borrowing costs, and facilitate credit growth¿a key ingredient to increasing investment," it added.