Mumbai: Global rating agency Moody's Wednesday reiterated its view that the country will remain one of the fastest growing large economies in 2016, but inflation and corporate profit trends are likely to determine the growth trend.
Moody's domestic affiliate ICRA Ratings too expects growth in gross value added at basic prices to be at 7.7 percent in 2016-17, from 7.2 percent in 2015-16.
Moody's has a rating of Baa3 with a positive outlook on the country.
"India enters 2016 on the cusp of a cyclical growth recovery, with inflation under control and the economy benefiting from lower commodity prices," Atsi Sheth, Associate MD for sovereign ratings at Moody's Investor Service, told reporters at the Moody's-ICRA seminar on 'Financing India's Growth' here today.
"Though India's growth is outperforming, it is perhaps not what people had anticipated at around 7.5-8 percent. But 7 percent growth is very good indeed," she said.
However, the trends like lower inflation and a steep fall in commodity prices led by steel and crude oil would only yield sustainable growth acceleration once corporate and bank balance sheets are repaired and the private sector remains internationally competitive, she added.
The rating agency said low inflation would indicate a greater balance between domestic demand and supply conditions and help the private sector remain internationally competitive.
"Because corporate profit taxes are an important source of government revenues, we believe that stronger corporate profits will support the government's fiscal consolidation efforts," she said.
Even though the country's growth is driven domestically, the external environment makes a lot of difference, she said.
According to Sheth, going ahead, the country is likely to face risk from the weak global growth and availability of easy and cheap capital.
"We are going into an environment where the Fed is raising rate and investors are risk averse. So, India is unlikely to have access to easy, cheap capital what it did 10 years ago," she added.
ICRA believes that a boost in consumption in 2016 will likely come from pay revisions for government employees and pensioners as well as a potential upturn in agriculture and rural demand.
It expects growth to rise to 7.7 percent in 2016-17, from 7.2 percent this fiscal.
"We believe that the lagged impact of reforms undertaken and the pay revision for government employees and pensioners as well as the likely cyclical upturn in agriculture and rural demand will provide a modest boost to economic activity in 2016," ICRA Senior Economist Aditi Nayar said.
While the pay revision, she said, will likely boost consumer demand, it will also pose a challenge to fiscal and inflation management.
A normal monsoon in 2016 after two successive years of poor rainfall would boost agricultural output, restore purchasing power of the farm sector and generate an uptick in rural demand, Nayar hoped.
On the banking sector, Moody's said an improving operating environment will lead to slower addition to NPAs over the next 12-18 months, which will result in stable credit metrics.
"While the stock of NPAs may continue to rise, the pace of new impaired loan formation in FY17 will be lower than the levels seen in the past four years," Moody's V-P and Senior Credit Officer Srikanth Vadlamani said.
ICRA said that over the next 12-18 months, the credit profile of public sector banks as a whole will be driven by their ability to reduce stress on assets, improve earnings and shore up capital.
ICRA's Group Head for financial sector ratings Vibha Batra said public sector banks will need around Rs 1.3 trillion in fresh equity or additional tier I capital during FY16-FY19 to maintain tier 1 capital adequacy just above the minimum need of 9.5 percent by March 2019, assuming an annualised credit growth of 13.5 percent.
"However, if public sector banks are only allocated the Rs 70,000 crore over the next four years, as stated by the government said last July, credit growth will have to drop to 8-10 percent," she added.
ICRA believes that as for private sector banks, their credit profiles remain superior to that of public lenders on better asset quality, earnings and capitalisation.
Moody's further said non-financial corporates will benefit from healthy domestic growth and accommodative monetary policies.
However, investment is constrained by high leverage levels of various corporate groups, weak asset quality of banks, structural issues in sectors like steel and power generation, and setback in high-profile policy changes such as GST.
A weak global growth and additional US rate hikes will also weigh on businesses, it said. On the power sector, Moody's negative outlook for the sector reflects the persistent challenges from high but moderating fuel supply risk, and the limited capacity to pay on the part of financially weak distribution utilities.