Moody's: India's reforms, if successful, would ease its debt burden, a key constraint on the country's credit profile

Moody's Investors Service says that India (Baa3 positive) is implementing a number of wide-ranging reforms that if successful, would gradually ease the government's high debt burden, which represents a key constraint on the sovereign's credit profile.

Moody's conclusions are contained in its just-released report titled "Government of India: Effective Implementation of Key Fiscal and Banking Sector Reforms Would Address Core Credit Challenges". The report focuses on the potential credit impact of three key pending reforms: the Goods and Services Tax (GST), the fiscal framework following the Fiscal Responsibility and Budget Management Act (FRBM) Committee recommendations, and NPA resolution measures.

On the GST, Moody's says that the short-term impact of GST reforms will be muted, but the long-term benefits will include higher productivity growth, due to efficiency gains in business operations, greater investment, as interstate tax barriers are reduced, and an expanded revenue base with enhanced tax compliance.

For the FRBM Committee recommendations, "The FRBM framework offers an opportunity to anchor fiscal consolidation by setting a medium-term target for the country's debt burden. Combined with higher nominal GDP growth, a credible fiscal framework that fosters fiscal responsibility at both the central and state government levels would contribute to the gradual reduction of India's high debt burden" says William Foster, a Moody's Vice President and Senior Credit Officer.

For the banking sector, Moody's says that recent government measures to address high NPAs and the promulgation of the Insolvency and Bankruptcy Code 2016 are credit positive for the sovereign, because they provide a clearer framework for NPA resolution. However, outstanding structural issues remain within the banking system, particularly within public sector banks, which further constrains banks' abilities to finance potential new investment and, therefore, weighs on private investment.

Moody's report also notes that the government's use of information collected from demonetization and financial inclusion efforts could help broaden the tax base by ushering in the previously unbanked informal sector. Recent expenditure reforms, including Direct Benefits Transfer, should improve expenditure efficiency, while the Aadhaar identification system can help reduce fiscal leakage.