India's GDP has crossed $3.5 trillion in 2022 and will be the fastest-growing G-20 economy over the next few years, but reform and policy barriers could hamper investment, Moody's said on Tuesday.
In a research report, the US-based rating agency said bureaucracy could slow approval processes in obtaining licences and setting up businesses, prolonging project gestation.
"India's higher bureaucracy in decision-making will reduce its attractiveness as a destination for foreign direct investment (FDI), especially when competing with other developing economies in the region, such as Indonesia and Vietnam," Moody's Investors Service said.
It said a large young and educated workforce, increasing nuclear families and urbanization will fuel demand for housing, cement and new cars.
Government infrastructure spending will bolster steel and cement, while India's net-zero commitment will drive investment in renewable energy, it said.
"While demand across the manufacturing and infrastructure sectors will grow 3-12 per cent annually for the rest of the decade, India's capacity will still rank well behind China's by 2030," Moody's said.
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It said despite the economy's strong potential, there is a risk that the pace of investment in India's manufacturing and infrastructure sectors could slow because of limited economic liberalization or slower policy implementation.
"Lack of certainty around the amount of time needed for land acquisition approvals, regulatory clearances, obtaining licenses and setting up businesses can materially prolong project gestation. Furthermore, India's limited multilateral liberalisation with respect to regional trade agreements will also weigh on foreign investments in the country," it said.
Ongoing efforts by India's government to reduce corruption, formalize economic activity, and bolster tax collection and administration are encouraging, although there are increasing risks to the efficacy of these efforts.
If implemented effectively, measures undertaken over the last few years – including those introduced during the pandemic to increase the flexibility of labour laws, raise agricultural sector efficiency, expand investment in infrastructure, incentivize manufacturing sector investment, and strengthen the financial sector – would lead to higher economic growth, Moody's said.