Rising oil prices key risk to India’s growth

​New Delhi: Higher crude price is a key risk to India's growth, but subsidy reform in petrol and diesel has diminished the risk to sovereign credit profile, Moody's Investors Service said on Wednesday.

As per market polls of 175 investors conducted by Moody's and its affiliate ICRA last month in Singapore and Mumbai, investors identified higher oil prices as a key risk to growth and said that there are risks to achieving 3.3 per cent fiscal deficit. 

The investors also said that the government's PSB recapitalisation package is not sufficient, given the banks have not been able to raise capital as planned. In its report Moody's said: "Similarly to the views of the poll respondents, we also consider higher oil prices to be a risk to growth, but risks to sovereign credit dynamics from oil has diminished in recent years following subsidy reforms to petroleum and diesel fuel; only liquefied petroleum gas and kerosene oil remain subsidised". 

The rating agency said it does not expect oil prices to remain elevated for an extended period, but this possibility "remains a downside risk". The price of Indian basket of crude surged from $66 a barrel in April to around $75 a barrel at present. With regard to recapitalisation plan for public sector banks, Moody's said although we expect the recapitalisation package to be sufficient to meet the minimum regulatory capital needs, it will be insufficient to support credit growth. "Banks have not been able to raise new capital from the equity markets as planned under the government's recapitalisation measures," it added. 

Poll participants favoured consolidating to five-to-10 public sector banks from 27 currently, in line with more recent government announcements. In October last year, the government unveiled a Rs 2.11 lakh crore PSU Bank recapitalisation plan. Of this, Rs 1.35 lakh crore is to come from the sale of recapitalisation bonds. The remaining Rs 76,000 crore will be through budgetary allocation and raising of funds by banks from the markets. 

However, contrary to investors' view that achieving fiscal deficit target would be a concern, Moody's said it expects the government to meet its target for the current fiscal, which will end in March 2019.