New Delhi: The greatest challenge facing the Indian economy is exposure to external shocks such as interest rate hike in the US and slowdown in China, and the risk has risen since last year, a Moody's poll said today.
About 75 per cent of the market players and investors polled expect India's economic growth to be in the range of 6.5-7.5 per cent over the next 12-18 months.
The findings were part of the poll of 110 market participants, including some of India's largest investors, intermediaries and issuers, conducted by Moody's Investors Service earlier this month.
Of those polled, 35 percent saw external shocks as the "greatest challenge facing the economy", up from just 10 percent in the previous May 2015 poll.
In contrast, 32 percent felt there is a sluggish reform momentum and 19 per cent saw infrastructure constraints, down from 47 percent and 38 per cent, respectively, in May 2015.
"The consensus view on India's economic growth prospects appears reasonably upbeat. Over three quarters of the market participants we polled believe that headline GDP growth will remain in a range of 6.5-7.5 per cent over the next 12-18 months," Moody's said in its report titled 'Heard From the Market: India Not Immune to External Risks'.
Compared with the last poll in May 2015, only 14 percent of participants now expect growth to accelerate to between 7.5-8.5 percent, down from 36 percent previously.
"Despite our audience's reasonably positive views on headline growth, we have seen a shift in the balance of risks to India's macroeconomic outlook," Moody's said.
"The market participants we surveyed are increasingly concerned about the potential spillover of external risks such as US interest rate tightening and China's ongoing slowdown, on India's growth story."
It said India is still regarded as much better placed than most of its similarly rated emerging market peers.
"Increased concerns about external shocks appear to reflect a more adverse global backdrop rather than India-specific external vulnerabilities having increased," it added.
As for revival of private sector investment, Moody's suggested that the government should take key reform initiatives and pass GST and land acquisition laws.
"The successful passage and implementation of the government's reform agenda will be an important driver of the fortunes of both India's investment cycle and corporate credit quality.
To date, the Modi administration's track record on reform has been mixed, with some signs of a loss of momentum in the latter stages of 2015," it said.
According to Moody's, while the government has made some progress on reforms to improve the operating environment and ease investment procedures, progress has been slow in two key areas: passing a unified Goods and Services Tax (GST) and the Land Acquisition Act.
"Execution of such measures will be important to ensure crystallisation and sustainability of a recovery in private sector investment in India," the rating agency said.
The market participants, according to poll findings, remain "relatively sanguine" on India's growth prospects despite some mixed economic data of late.
"Even so, at a time when many other emerging markets are experiencing significant macroeconomic adjustment, including softer economic expansion, achieving the consensus outturn would make India one of the fastest growing major economies globally in 2016," Moody's said.
Moody's forecast India to clock a 7 per cent growth for the current fiscal and increased it further to 7.5 percent for the next fiscal.
"While high-frequency data remain volatile, the general trend is one of gradual recovery, which we expect to persist in months ahead.
Our expectations of India's growth out-performance vis-a-vis similarly rated peers, in turn, provide a key pillar of support for the positive outlook on the country's Baa3 sovereign rating," it said.
Moody's believes that India has an edge in weathering a more challenging external environment, saying lower commodity prices, reduction in current account deficit, recovery in growth supported by domestic monetary policy easing in 2015 and reduction in inflation all augur well for the economy.
"The country is much less directly exposed to Chinese demand than most major emerging markets. And finally, the authorities are putting in place a policy framework to address macroeconomic imbalances as well as infrastructure and banking sector weaknesses," Moody's said.
The poll also found that asset quality and capital are expected to remain binding constraints for Indian banks.
Of those polled, 40 percent expect a reduction in weak assets in coming 12-18 months while 45 percent believe that asset quality is unlikely to improve.
Meanwhile, there was a clear consensus that public sector banks will continue to underperform.
In November 2015, Moody's had changed the outlook on India's banking system to 'stable' from 'negative' on expectations that a gradually improving operating environment will result in a slower pace of problem loan creation and, as a result, the credit metrics will gradually stabilise.