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Moody's: India's bad debt resolution reforms are credit positive

India's latest efforts to curb the country's high nonperforming assets level are credit positive for the sovereign and would help ease the government's high debt burden if implemented successfully, Moody's said in a report.

The rating agency said May 31 that the government's recent measures and the promulgation of the Insolvency and Bankruptcy Code 2016 provide a clearer framework for NPA resolution. The government had earlier introduced a series of new strategies to help ease the high NPA level in the banking sector, including plans to change the current guidelines for restructuring stressed loans.

However, Moody's added that outstanding structural issues remain within the banking system, particularly within public sector banks, which continue to constrain banks' abilities to finance potential new investment.

Meanwhile, the government's new sales tax for goods and services should usher in higher productivity growth in the long term due to efficiency gains in business operations, greater investment and an expanded revenue base with enhanced tax compliance, the rating agency said. It noted, however, that the short-term impact of the tax will be muted.

The country is also expected to benefit from the fiscal framework following recommendations of the Fiscal Responsibility and Budget Management committee. The framework offers an opportunity to anchor fiscal consolidation by setting a medium-term target for the country's debt burden, according to William Foster, a Moody's vice president and senior credit officer. A framework that fosters fiscal responsibility at the central and state government levels, and a higher nominal GDP growth, should help reduce government debt, he added.