Global credit rating agency Moody's Investors Service on Monday said political divisions in India will keep the reform process uneven while terming the recent FDI norms relaxation as credit positive.
In a statement, Moody's said despite some progress in improving the operating environment and easing investment procedures, reforms have stalled in two key areas - passing a unified goods and services tax and the Land Acquistion Act.
"We expect the political division will keep the reform process uneven and slow-moving," it said.
Moody's said the government's June 20 announcement of reforms to rules on foreign direct investment (FDI), expanding the range of industries under automatic approval, raising sector caps and relaxing local sourcing requirements was "credit positive because it demonstrates a continuation of reform momentum and paves the way for private investment and a boost in productivity".
"Additionally, higher FDI inflows will help support India's external financing needs at a time when portfolio flows have moderated," it said.
Net FDI inflows have increased over the past two years, reaching record highs in the fiscal year that ended 31 March 2016 of $36.0 billion from $24.2 billion on average during the preceding three fiscal years, Moody's said.
Currently, higher FDI inflows more than cover the current account deficit, which was 1.1% of GDP in fiscal 2016, down from 4.8% in fiscal 2013, the credit rating agency said.
"FDI inflows provide a stable source of financing and mitigate the downside risks to the current account from potential weakness in services exports and remittances. Additionally, higher FDI will reduce other external financing needs, a positive at a time when the portfolio flows into India and other emerging markets have been volatile," Moody's said.
The rating agency expects FDI inflows to remain robust given the development of industrial corridors, which will form a network of industrial bases between India's big metropolitan cities and investment and manufacturing zones under the "Make in India" and "Smart Cities" initiatives.
According to Moody's, stronger FDI alone will not deliver markedly higher growth and productivity in India. FDI currently accounts for less than 10 per cent of total fixed asset investment and will not substitute for muted domestic private investment.
Growth in total investment remained soft at 3.9% in fiscal 2016 and continued high corporate leverage, eroding corporate profits and impaired credit supply will thwart investment activity for at least several quarters, Moody's said.
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