High expectations of Narendra Modi forming a BJP-led govt after Lok Sabha elections and thereafter powering reforms, something that UPA govt shied away from, have been hit today by a Moody's report on India's economic growth rate.
India will not be able to revert to high economic growth path of 7-8 per cent anytime soon even if it pursues a strong reforms agenda, says Moody's report.
"Even if the new government pursues a strong reform agenda, the depth of the issues to be addressed means that India’s economy is unlikely to return to previous growth rates of around 7-8 per cent in the near future," the report said today.
Like in Brazil, India’s government has only limited opportunities to provide some fiscal stimulus to offset a possible slowdown in capital flows, it said.
The report expects the debt-to-GDP ratio to rise to more than 65 per cent this year.
Quoting the Institute of International Finance, the reports said that portfolio flows into India so far this year suggested that global investors continue to perceive attractive investment opportunities in India.
It added: "Some of these capital inflows may be based on expectations of reforms after the parliamentary elections.
These expectations could be disappointed if a coalition government lacks the political flexibility to pass reforms."
Further, it said that India's economic growth in 2014 is likely to be 4.5-5.5 per cent and in 2015, it would grow at a rate of 5-6 per cent. In 2012 and 2013, India's GDP grew by 4.5 per cent annually.
"Growth prospects for India are similarly hampered by a lack of reforms in recent years. The country is also vulnerable to capital outflows given a history of sizable current account deficits (CAD)," it said.
"Although the CAD was reduced to only 0.3 per cent of GDP at the end of 2013, some of that narrowing is unlikely to be sustained once restrictions on gold imports are lifted." the report added.
It said inflation, which was over 8 per cent, implies that the central bank has no room to ease monetary policy in the short term and may even need to tighten further.