Global credit rating agency Moody's Investors Service has said that India's credit profile is supported by growth potential, high private savings enabling access to funds for the government at favourable terms.
It also said these credit strengths were balanced against high government debt -- 67.4 percent of gross domestic product -- regulatory and infrastructure constraints, sluggish pace of reform and the contingent liability risk to the sovereign from public sector banks' high and increasing non-performing loans.
"Over the past year, external developments favourable to India such as lower global oil prices have combined with policy measures -- including tighter or less accommodative fiscal and monetary policies than in the past -- to move the economy towards a more stable macroeconomic development with smaller fiscal deficits, lower inflation and a narrower current account deficit," Moody's said in its annual credit analysis of India.
But, one short-term consequence of the policy setting, along with two successive unfavourable monsoon in 2015 and the year before, has been comparatively moderate nominal GDP growth, the agency added.
Moody's anticipates corporates' profitability to remain subdued which will continue to dampen their ability and willingness to invest in the next few quarters.
"We forecast real GDP growth at around 7.5 per cent in the next two years. In nominal terms, we do not expect GDP growth to rise above 10 per cent until FY2017," Moody's said.
According to Moody's, sustained fiscal consolidation, stable inflation at moderate levels and progress on reforms aimed at enhancing the business environment would contribute to sustained growth at robust levels.
Profit growth and persistent income would rise government revenues and contribute to improved fiscal metrics.
While the country has institutional strength of checks and balances there are offsetting weaknesses like an uncertain regulatory environment, corruption, a slow-moving judicial system and, in general, inefficiencies in the delivery of government services.