World Economy

Failure of Reforms Could Hamper Investments

Failure of Reforms  Could Hamper InvestmentsFailure of Reforms  Could Hamper Investments

Moody’s Investors Service Wednesday cautioned that a loss of momentum on reforms may hamper investment and prove to be a ‘downside factor’ for Indian companies, even as it said most corporates will benefit from strong economic fundamentals and accommodative monetary policy.

It further said that weak global cues and an impending US rate hike may also have an impact on Indian businesses, PTI reported.

Moody’s said that a failure by the government in implementing key reforms such as goods and services tax and land acquisition laws could hamper investment and signal a derailed reform prospect.

“A healthy 7.5% GDP growth for India for the fiscal year ending March 2017 and a pick-up in manufacturing activity will be broadly supportive of business growth,” Moody’s Vice President and Senior Credit Officer Vikas Halan said.

But despite these overall supportive domestic conditions for the country’s corporates, potential headwinds loom from a loss of reform momentum, he said.

Prime Minister Narendra Modi’s administration so far this year has been unable to enact legislation on key reforms, including a unified GST and the Land Acquisition Bill.

“It seems highly unlikely that the major reforms will get enacted by the Upper House of Indian Parliament where the ruling coalition is in minority. A failure to implement these reforms could hamper investment amid weak global growth,” Halan added.

 Fall in Prices

In its 2016 outlook for Indian non-financial corporates, Moody’s said a 7.5% growth, easing inflation resulting in lower interest rate will lead to improving corporate cash flows and be broadly supportive of business growth.

“However, the corporates remain vulnerable to the volatile Indian rupee as against the US dollar and to low commodity prices, which has in turn led to a sharp decline in external trade,” Halan added.

The fall in commodity prices has benefited many Indian corporates given the country’s status as a net importer of raw materials and its recent history of high inflation. But low commodity prices will result in deterioration of credit metrics of metals and mining companies, it said.

 Credit Metrics

The other ‘downside factors’ listed by Moody’s in its report are loss of reform momentum leading to annual GDP growth falling below 6%, resulting in a deterioration of credit metrics. Also higher interest rates brought on by rising inflation and/or exchange rate volatility, resulting in a tight funding environment is a factor.

Moody’s said that the upside factors include further government measures that could sustain the GDP growth at 8% or more, leading to a broad-based improvement in corporate credit metrics.

Besides, improvement in the global macroeconomic environment leading to stabilizing commodity prices and credit markets would be positive, it said.

Stating that loss of reform momentum remains a concern, Moody’s said: “The government is unlikely to win a majority in the upper house if it keeps losing state elections like it did recently in Delhi and Bihar. Opposition parties are unlikely to allow key reforms to go through.”

By sector, Moody’s expects upstream oil and gas companies to benefit from lower fuel subsidy burdens, although low crude and domestic natural gas prices will continue to hurt profitability.

 Sustained Growth

Moody’s negative outlook for the steel industry reflects elevated leverage and an extended period of low prices due to continuing steel imports, while the negative outlook for metals and mining companies reflects bleak global commodity prices.

In the real estate sector, Moody’s expects demand to improve in 2016 on the back of lower interests rates, although approval delays could push back project launches for property developers.

In the auto sector, Moody’s said the retail sales volume will grow 6% in 2016 on the back of sustained growth in passenger vehicles sales and a recovery in commercial vehicle sales.

The telecom companies that Moody’s rates in India have reported improving revenue per user and EBITDA margins, however, the competition remains intense and the regulatory framework continues to evolve. EBITDA is a measurement of a company’s operating profitability. It is equal to earnings before interest, tax, depreciation and amortization divided by total revenue.