India’s rating outlook stable, says Moody’s

Nov 28 2012, 00:58 IST
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SummaryOn a day the OECD cut its global growth forecast for 2012 sharply to 2.9% from the May prediction of 3.4% citing the euro zone debt crisis as the greatest downside risk and the concern over the US fiscal cliff, India got a reprieve as Moody’s Investors Service said its Baa3 rating for the country is stable.

On a day the OECD cut its global growth forecast for 2012 sharply to 2.9% from the May prediction of 3.4% citing the euro zone debt crisis as the greatest downside risk and the concern over the US fiscal cliff, India got a reprieve as Moody’s Investors Service said its Baa3 rating for the country is stable. The Indian government is struggling to energise revenue streams in a slowing economy in order to keep this year’s fiscal deficit at 5.3%. OECD also projected India’s growth this fiscal at 4.4% (against 6.9% in 2011-12) citing the "broad-based slowdown".

The move by Moody’s, which it said doesn’t constitute a rating action, comes in the shadow of the perceived threat of a rating downgrade by other credit rating agencies like Standard & Poor’s. Fitch also has a negative outlook on India.

Moody’s ascribed its decision to maintain its stable outlook on India to the country’s high household savings rate and relatively competitive private sector. These two factors, the agency said, will “ultimately raise the GDP growth rate from around 5.4% in FY 2013 to 6% or higher in FY 2014”.

The agency, however, added: "The rating is constrained by the credit challenges posed by India’s poor social and physical infrastructure, high government deficit and debt ratios, recurrent inflationary pressures and an uncertain operating environment."

On the global front, there was encouraging news on Monday with the IMF and euro zone finance ministers reaching an agreement on a new debt target for Greece, entailing immediate release of a tranche of loans to the crisis-ridden economy.

India’s revised fiscal deficit target of 5.3% for this fiscal looks ambitious to many independent analysts due to below-par revenue buoyancy and difficult spending cut plans. There are fresh doubts about the government’s ability to meet even the relaxed target (budgeted deficit was 5.1%) following the tepid response from telecom companies to the recent 2G spectrum auction ( the auction fetched just Rs 9,407 crore against the estimated Rs 30,000 crore) and the stunted disinvestment programme.

Referring to India’s recent reform measures like opening of the retail sector to foreign direct investment, Moody’s said: “Given the delayed timing and still modest scope of these measures, growth may remain subdued in the near term amid continued domestic political uncertainty and a global slowdown."

It added, “Unanticipated domestic political turmoil, a further worsening in global growth and financial conditions, or a surge in food and other commodity prices could all affect the pace and timing of the recovery.”

Standard & Poor’s had last month cautioned that the country faces a one in three likelihood of rating downgrade for India over the coming 24 months.

According to OECD, the recovery of the world economy next year will be “hesitant and uneven” due to the impact of Europe’s debt crisis on other economies including the US and developing countries.

The OECD expressed worries about the US ‘fiscal cliff’ stating, “If the fiscal cliff is not avoided, a large negative shock could bring the US and the global economy into recession.”

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