Curbs on govt spending risks growth in India, warns Moody’s

A decline in government spending could upset India's hopes of faster economic growth as a draw-down on overall spending through the government's divestment programme combined with checks on public spending could curb overall demand and hence economic growth, says rating agency Moody's Investor Services.

At the same time the rating agency wants the government, which depends very much on divestments for spending, to make up for lost time in meeting divestment targets. For the government is depending on divestment of shares of public sector enterprises to finance plan expenditure.

''No disinvestment target has been met over the past five years, so the government needs everything to get it right this time around,'' it said.

''India's state-owned companies are notoriously inefficient, with significant bureaucracy and endemic corruption. Asset sales can make companies more productive and should ease the supply bottlenecks choking the economy,'' the rating agency said.

Raising enough resources is key to growth as any shortfall in revenue will prompt the government to cut its expenditure to meet the 3.9 per cent fiscal deficit target for the current fiscal.

''India's economy is on a cyclical upswing. Forward-looking indicators suggest domestic demand is gathering momentum,'' it said.

India is banking on foreign investments to pump growth although the country ranks 140th in ease of doing business. This, according to Moody's, is a key to India's manufacturing trough that remains at about 19 per cent of its GDP compared with 30 per cent for the rest of South East Asia.

Moody's has forecast India to achieve a growth rate of 7.5 per cent, the same as projected by the World Bank and the International Monetary Fund.