Moody's to Narendra Modi: Rein in members or risk losing credibility

New Delhi Referring to the ethnic tensions in the wake of controversies over beef and other issues Moodys on Friday said that Prime Minister Narendra Modi must keep BJP members in check or risk losing losing domestic and global credibilityStating that BJP does not have a majority in Rajya Sabha to pass crucial reforms and the Opposition was being obstructionist Moodys Analytics said in a report that the government has also not helped itself in recent times withcontroversial comments from various BJP membersWhile Modi has largely distanced himself from the nationalist jibes the belligerent provocation of various Indian minorities has raised ethnic tensionsAlong with a possible increase in violence the government will face stiffer opposition in the upper house as debate turns away from economic policyModi must keep his members in check or risk losing domestic and global credibility the report said The comments from Moodys Analytics the economic research and analysis division of Moodys Corporation are the first by any major global institution over the recent political controversies in IndiaMoodys Analytics however said its commentary is independent and does not reflect the opinions of Moodys Investors Service Inc the credit ratings agency which is also a subsidiary of Moodys CorporationThe report titled India Outlook Searching for Potential further said that the ongoing assembly elections in Bihar could prove pivotal to Modis leadershipThe 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 outcomeswill dictate the extent of success it addedMoodys projected Indias GDP growth for September quarter at 73 per cent while for the full fiscal it would be 76 per centIt 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 optimismThe 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 saidKey economic reforms could deliver greater potential GDP as they would improve Indias 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 Moodys saidLooking beyond the business cycle the governments reform agenda needs attention to achieve longterm growth Prime Minister Narendra Modis rightleaning 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 addedOn interest rates it said low rates will buttress the economy in the shortterm but reforms are needed to reach longterm potential growthCapacity utilisation has been low across industries this year The capital expenditure pipeline is running dryHowever interest rate cuts should encourage investment as will the softer inflation profile it addedMoodys 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 yearOn the impending US rate hike it said The rupee will likely come out relatively unscathed thanks to the RBIs bulging foreign exchange reserves stockpileThe slowdown in global growth will prove a major headwind for Indian exporters Moodys said adding that the fall inexports from 2015 is expected to continue in 2016The newfound stability in Indias 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 Moodys saidIt further said there are indications that investors have been less optimistic about Indias 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 Indias debt market it addedRBI is consistently looking to improve banking and financial structures Moodys saidWe believe a move towards full capital account liberalisation is inevitable in India This will likely occur in the next two to four yearsA freer capital account will give Indian companies greater access to overseas markets lower borrowing costs and facilitate credit growthiquesta key ingredient to increasing investment it added