NEW DELHI: Even as the China jitters continued to roil world financial markets, Moody’s Investors Service gave a vote of confidence to the Indian economy, placing it higher relative to other countries it rates.

“We assess India’s economic strength as High (+) relative to all other sovereigns we rate. The size of its economy, its growth rate and our expectation of continued strong economic growth support this assessment,” Moody’s said in a report, ‘Credit Analysis: India, government of ‘, released on Tuesday.

The ratings firm said the Indian economy’s scale, currently pegged at $2 trillion, insulates it to some degree against global or domestic trends that could otherwise hurt growth. It backed the government’s reform agenda. Authorities are making efforts to address some of the institutional constraints faced by the country, it said, while also cautioning that such efforts may not immediately improve growth or governance.

“If these efforts are successful, however, stronger institutions are likely to also result in an improved operating environment for investment and growth, over a three- to five-year period,” Moody’s said. In such a situation, it said, India’s rating could go higher.

This report is an annual update to the market, and does not constitute a rating action. Moody’s currently has a ‘positive’ outlook on India’s Baa3 rating, the lowest investment grade rating. The positive outlook reflects the ratings firm’s view that recent and proposed policies will stabilise inflation, improve the regulatory environment, increase infrastructure investment and lower government debt ratios. India’s rating could be upgraded if Moody’s expectations of gradual but credit positive reforms are realised in actual policy implementation and if the recent improvement in inflation, fiscal and current account ratios is sustained, the report said.

The comments come a week after Moody’s cut India’s growth forecast for the current fiscal year to 7% from 7.5%. “Although it has slowed from peaks achieved a decade ago, India’s GDP growth – which Moody’s forecasts at 7% this year – is likely to surpass the average for its peers, as it has over the last decade,” Moody’s said.

Moody’s has, however, cautioned that the rating outlook would likely return to ‘stable’ from ‘positive’ “if there is a reversal of the policy reform process; if banking system metrics continue to weaken; or, if there is a decline in foreign exchange reserves coverage of external debt and imports.” Noting that in addition to lower oil prices, tighter fiscal and monetary policies have also helped restore India’s macro-economic balance over the last two years, Moody’s highlighted that this improved balance offered the Indian economy and financial system some resilience to potential volatility in global capital flows in coming months. It said the government’s efforts to revive private investment, particularly in manufacturing, appear to be key to a sustainable growth recovery. “If successful, an acceleration in manufacturing investment will also alleviate the economy’s current vulnerability to fluctuations in agricultural output, which makes up 17% of GDP, but a much higher proportion of employment,” the ratings firm said.

It sees an “uncertain regulatory environment, a slow-moving judicial system, a series of corruption scandals and inefficiencies in delivery of government services” among the weaknesses of the economy. “We also use price stability as a gauge for policy effectiveness, and India’s high and recurrent inflation – partly a result of regulatory and infrastructure constraints – reflects institutional challenges,” it said.

Moody’s said a deterioration in macroeconomic balance between 2011 and 2013, coupled with political and policy uncertainty ahead of the 2014 elections, could have contributed to the decline in India’s competitiveness scores.

ET View: Reform or Perish Shrewd investors, confident of their own capacity to assess risk and return, will act freely. But that does not mean Moody’s assessment will not have an impact on investment flows. The government should stay focused on macro-economic management, revive infrastructure projects stuck due to loans turning sour, and remove hassles for investors doing business here. A purposeful bankruptcy code to bring down bad loans and redistribute the assets locked up in failed projects brooks no delay. There is little choice but to push reforms in an uncertain global economic environment.