Tinkering with RBI freedom will hit growth: Moody’s

NEW DELHI: Tampering with the Reserve Bank of India’s independence will hurt India’s economic prospects, the research arm of ratings agency Moody’s warned while pointing out that the government had failed to deliver promised reforms.

The lack of policy change could derail medium- to long-term growth prospects, Moody’s Analytics said in its report, India Outlook: Waiting for Reforms to Fuel Growth, which was released on Thursday. Moody’s Analytics is a division of Moody’s Corp. that engages in economic research and analysis. The comments are significant considering that Moody’s is the only global agency that has a positive outlook on India’s barely investment grade rating.

“Green shoots are slowly emerging, but the government’s failure to deliver promised reforms is the major impediment,” it said in the report, adding that there has been a cyclical upswing since late 2014 but growth has failed to gain broader momentum. Moody’s Analytics expects India’s GDP to grow 7.6 per cent in 2015 and accelerate to 8 per cent in 2016, helped by lower interest rates. India’s economy grew 7.3 per cent in FY15.

The report has strongly criticised the proposed monetary policy committee structure, saying it will undo the “RBI’s good work.” “Overall, India’s monetary policy, with governor Raghuram Rajan at the helm, has been effective,” it said. “Inflation has fallen, external accounts have improved, and the economy is poised for further rate cuts.” The revised draft of the Indian Financial Code (IFC) has proposed a seven-member monetary policy committee, with four of them picked by the government and no veto power for the governor.

“We believe that a government-elected panel undermines the RBI’s independence. Moving to the new model would severely dent the RBI’s competency: Credibility would be lower, politics would drive decisions, and transparency would be reduced,” the report said. “Overall, we believe that tampering with the central bank’s independence would make it difficult to anchor inflation expectations. This would weigh on India’s economic prospects, particularly financial market stability. But given the criticism of the draft bill, it is unlikely to pass Parliament.”

The government has already clarified that these are only proposals of the Financial Sector Legislative Reforms Commission (FSLRC) that would be considered when a policy is framed. Pulling up the government for “empty promises,” the research report said political infighting is denting business confidence and the government’s reform agenda isn’t likely to advance soon. “Without a majority in the upper house, the ruling Bharatiya Janata Party’s power has been nullified and the Opposition has blocked proposed reforms,” it said.

“Key reforms like the land bill, flexible labour laws, and the goods and services tax have failed to pass Parliament. And given the political seesaw, these are unlikely to be delivered until later this year or even 2016.” The report urges swift reforms calling them necessary if “India is to catch up to global economic powerhouses such as China.”

The report said the land bill will act as a catalyst to investment and its passage will improve India’s business environment by speeding up the conversion of plots for infrastructure use. “Foreign firms are wary of investing in India, as lengthy delays in acquiring land tend to stall projects,” the report said.

Article source: http://economictimes.indiatimes.com/news/economy/policy/tinkering-with-rbi-freedom-will-hit-growth-moodys/articleshow/48289888.cms

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