India is set to be the fastest-growing economy in the G20 over the next few years, according to Moody's Investors Service, with manufacturing and infrastructure sectors likely to provide an impetus. However, investments could face some push-back from "reform and policy barriers".
"In the Union Budget in February 2023 alone, the government allocated around $120 billion toward various national infrastructure projects, including $30 billion each toward railways and national highways," Moody's said in a report dated May 23.
The investment in housing and large infrastructure spending is expected to spur demand for cement and steel, while the government's net-zero commitment will boost the renewable energy sector.
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"These investments, we believe, will be instrumental in India achieving GDP growth of 6.1 percent and 6.3 percent respectively, for fiscal years ending March 2024 and 2025, the highest among its G20 EM (emerging market) peers, and higher than China's growth in 2023 and 2024," Moody’s added.
According to Moody's, India's annual growth rate has exceeded that of China on only four occasions in the last 19 years.
Moody's growth forecast for India is lower than the official projections. The Reserve Bank of India (RBI) expects India's GDP to grow by 6.5 percent in 2023-24, 40 basis points faster than Moody's.
One basis point is one-hundredth of a percentage point.
Earlier today on May 24, RBI Governor Shaktikanta Das said growth in 2022-23 could top the statistics ministry's second advance estimate of 7 percent.
Scale advantages and reform impediments
According to Moody's, India will achieve significant scale across several industries – from IT services to steel, cement, aviation, and power, among others – over the next decade.
"Leading companies in India's manufacturing and infrastructure sectors will spend around $150 billion on building new capacities through the end of the decade. Most rated companies will fund their investments through a judicious mix of cash accruals and debt. But ample balance sheet liquidity and debt reduction at most rated companies over the last three years will help to preserve credit profiles," Moody's noted.
While government policies will provide crucial support to economic growth, Moody's warned there was a risk that the pace of investment in manufacturing and infrastructure could be hindered by slow policy reforms and implementation.
"India's higher bureaucracy in decision making will reduce its attractiveness as a destination for foreign direct investment, especially when competing with other developing economies in the region, such as Indonesia and Vietnam," the ratings agency said, pointing out the uncertainty around the time is takes to acquire land and get regulatory approvals and licenses. India's absence of regional trade agreements is also also expected to be a drag on foreign investments.
"Ongoing efforts by India's government to reduce corruption, formalise economic activity, and bolster tax collection and administration are encouraging, although there are increasing risks to the efficacy of these efforts," Moody’s said.