New Delhi: Taking note of the Anna Hazare-led agitation for enactment of Jan Lokpal Bill, global credit ratings agency Moody's on Monday said cases of corruption and the recent scandals have impaired business environment in India. It, however, has pegged India's growth at 7.5 - 8 per cent for the current fiscal.

The agency, in its annual sovereign credit update on India, said that higher interest rates as well as global economic uncertainties could affect the country's economic expansion in the near term. Moody's added that the "cyclical slowdown" is unlikely to change its credit outlook of the country.

"Corruption, highlighted in recent scandals around the Commonwealth Games as well as telecoms licensing, impairs a business environment... The protests around the Lokpal/Jan
Lokpal Bill are also an indication that corruption is a key concern across the country," Moody's said. It added, however, that the agitation also showed the resilience of India's democratic system.

"The most recent policy battle -- over the anti-corruption Lokpal Bill -- provides vivid evidence of the strengths of India's democracy (vociferous and organized dissent that checks government actions) and its challenges (protracted negotiations before any initiatives can be implemented)," Moody's said.

Besides corruption, the agency mentioned bureaucratic logjam and slow pace of judicial decision-making as factors hindering the Indian economy.

"There are some predictable drawbacks to a system engineered to manage a vast and diverse country – decisions through the bureaucratic apparatus still move slowly and the
judicial system is burdened with a huge backlog of cases.”

According to the agency, both domestic business confidence and foreign inflows may suffer in the wake of a global slowdown and called for policy actions to deal with it.

Despite various drawbacks, the country's democratic system, a free press and well defined system of checks and balances allows the political process to build a consensus regarding the interest of a billion-plus population of diverse culture, ethnicity and economic inequality, the report said.

Economic growth at 7.5-8% in FY'12

The global rating agency Moody's has pegged India's growth at 7.5 - 8 per cent for the current fiscal, saying that higher interest rates as well as global economic uncertainties could affect the country's economic expansion in the near term.

In its annual sovereign credit update on India, Moody's, however, said, "Moody's expects GDP growth of 7.5-8 per cent in 2011-12 ...Given current global uncertainty, and the continuing transmission of the RBI's tightening over the last year, the risks to both forecasts are on the downside."

"Although rising domestic interest rates and an uncertain global economic environment could dampen India's near term GDP growth, a cyclical slowdown is unlikely to alter
its credit outlook," it added.

India's economy grew at 8.5 per cent in 2010-11. The projection made by Moody's in its latest report for the current fiscal is below the government's and RBI's forecast. While the government expects the country's Gross Domestic Product to grow at the same pace this fiscal also, the Reserve Bank has projected economic growth at 8 per cent.

Moody's report also said that inflation is likely to moderate to around 7 per cent by March 2012, a projection in sync with that made earlier by the RBI.

"Moody's expects ... inflation to abate slowly over the course of the year to about 7 per cent ... Should global growth decelerate, the concurrent decline in global commodity prices would alleviate India's inflation problem and likely allow for a pause or even reversal in monetary tightening," it said.

Moody's said that India faces a renewed period of global uncertainty while trying to rebalance its own macro-economic position. Headline inflation has been above 9 per cent since December 2010, while food inflation breached the double-digit mark in mid-August.

The RBI has hiked interest rates 11 times since March 2010 to curb demand and tame inflation. India Inc has blamed the repeated rate hikes, which has resulted in rise in the
cost of borrowings, for bringing down investments and industrial growth.

The economy expanded by 7.7 per cent in April-June, the slowest growth in six quarters.

"Of concern is the apparent slowdown in investment in recent months, blamed on rising domestic financing costs as well as policy uncertainty in the wake of recent telecoms
related scandals," Moody's said.

In its report, Moody's said the room for further fiscal stimulus is limited on account of the government's target to cap fiscal deficit at 4.6 per cent of GDP in 2011-12, as against 4.7 per cent in the last fiscal.

The agency said that its outlook on India's 'Baa3' foreign currency government bond rating remains stable.

Moody's also has a 'Ba1' rating on India's local currency debt ratings. While 'Baa' rating signifies moderate credit risk, the 'Ba' rating is among the lowest investment grade.

"The outlook on the country's 'Baa3' foreign currency government bond rating is stable. The gap between the 'Baa3' foreign currency debt and 'Ba1' local currency debt ratings reflects the potential likelihood that the government could prioritise its external obligations over its domestic obligations..."

According to Moody's, this could happen as India's external obligations, owed mostly to official creditors, are a relatively small proportion (5-6 per cent) of the government’s
total debt and are easily repayable given the country's strong external reserves position.

It said that India's medium to long term economic potential continues to be buoyed by its demographic profile, robust savings and investment rates and the rising international competitiveness of its corporations.

"Indian economy has demonstrated resilience to political, economic and financial shocks over the years. While it is not immune to an international growth slowdown, the strength of
domestic demand and the diversity of the economy provides a buffer against a deceleration in globally exposed sectors," it said.

India's foreign currency assets are almost four times its annual foreign debt repayment obligations.

Moody's termed as 'moderate' the country's institutional strength and said a democratic system, free press, and a well defined system of checks and balances allows the political
process to arrive at a consensus regarding the interest of a billion-plus population of diverse culture, ethnicity and economic inequality.

(Agencies)