Moody’s Investors Service on Tuesday retained India’s sovereign credit rating at ‘Baa3’ – the lowest investment grade, while maintaining ‘stable’ outlook. It sees India’s low per capita income and high general government debt as major risks in the future. Moody’s cited India’s large and diversified economy with high growth potential, a relatively strong external position, and a stable domestic financing base for government debt as the reasons behind its decision to affirm the rating. The stable outlook has been retained because risks from negative feedback between the economy and financial system are receding, it said.
Global challenges unlikely to derail economic recovery from pandemic
Moody’s downplayed the impact of global challenges on the Indian economy. “Global challenges including the impact of the Russia-Ukraine conflict, higher inflation and tightening global financial conditions on the back of policy tightening are unlikely to derail economic recovery from the pandemic,” it said. According to the global rating firm, low per capita income, high general government debt, low debt affordability and limited government effectiveness remain the principal credit challenges for India.
Higher capital buffers and greater liquidity, banks and non-bank financial institutions pose much less risk to the sovereign than previously anticipated, facilitating the ongoing recovery from the pandemic, the agency noted adding that weaker economic conditions than what Moody’s currently expects point to lower growth over the medium term and/or a resurgence of financial sector risks. While risks stemming from a high debt burden and weak debt affordability remain, Moody’s expects the economic environment to allow for a gradual narrowing in the general government fiscal deficit over the next few years, avoiding further deterioration in the sovereign credit profile..
India’s government debt burden higher, debt affordability lower
According to Moody’s report, India’s still low incomes limit households’ capacity to absorb domestic, external or weather related shocks. The agency said that Indian households’ limited capacity to absorb shocks could exacerbate stresses from uneven distribution of income given that a large proportion of the labour force is employed in the informal and agriculture sector. On high government indebtedness, the rating agency said that India’s general government debt burden is higher and debt affordability is lower compared with Baa-rated peers. It expects only a gradual consolidation of the fiscal deficits between 2022-23 and 2024-25 and thus sees debt stabilising at around 80% to GDP, still significantly higher than similar rated peers which have a median of around 55%.
Effective implementation of fiscal policy measures to support credit profile
Moody’s said it could upgrade the rating if India’s economic growth potential rose materially beyond the agency’s expectations, supported by effective implementation of economic and financial sector reforms that led to a significant and sustained pickup in private sector investment. “Effective implementation of fiscal policy measures that resulted in a sustained decline in the government’s debt burden and improvements in debt affordability would also support the credit profile,” said. Note that last year in October, Moody’s changed outlook on India’s ratings to stable from negative and affirmed its foreign-currency and local-currency long-term issuer ratings and the local-currency senior unsecured rating at Baa3.
Earlier this year in June, Fitch Ratings had revised its outlook for India’s long-term foreign currency Issuer Default Rating (IDR) upwards to ‘stable’ from ‘negative’ after a gap of two years, even as it retained the sovereign rating for the country at the lowest investment grade of ‘BBB-’ continuously for 16 years. All the three top rating agencies — S&P, Moody’s and Fitch — assign similar ratings and outlook for India currently.