In a big relief which was hailed by the stock markets zooming to recent new highs, rating agency Moody’s, on Tuesday, pegged India’s credit outlook as ‘stable’ on account of its strong economic growth and high savings and investment rates but cautioned against the challenges of high fiscal deficit and persistent inflationary pressure facing the economy.
In its ‘Credit analysis on India’, Moody’s pointed out that even as the country’s ‘Baa3’ sovereign rating is supported by credit strengths — a large, diverse economy, strong GDP growth, savings and investment rates — there were numerous credit challenges which constrained the rating.
“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,” Moody's said while noting that it was being further constrained by the country’s ‘complex regulatory environment’ and a tendency towards inflation.
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Alongside, Moody’s pointed out that India’s fiscal position has also been a rating constraint for long, even as the government has geared up to contain the fiscal deficit to 5.3 per cent of the GDP (gross domestic product) in 2012-13. Towards this end, although the government has announced a number of measures to speed up infrastructure development and liberalise foreign direct investment (FDI) norms, the rating agency appears to be circumspect about the impact. “However, 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 said.
Domestic inflation
Moody’s said persistent domestic inflation and wide fiscal deficits precluded domestic policy loosening to combat the global growth downturn over the last year. As for the stable outlook on India's rating, it said it is based on “our expectations that India's structural strengths — a high household savings rate and relatively competitive private sector — will ultimately raise the GDP growth rate from around 5.4 per cent in 2012-13 to 6 per cent or higher in 2013-14...”
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While the second quarter (July-September) GDP numbers are slated for release on November 30, Moody’s had projected the Indian economy to have grown by a little over 5.5 per cent during the three-month period. In its assessment last week, the rating agency viewed that the “reality of India's deep-seated structural problems” has begun to set in while the initial spike in investor sentiment after recent reforms faded out.
‘Baa’ range
Stressing on the fiscal position being a constraint, the Moody’s report said the government's annual deficits tend to be among the highest within the ‘Baa’ range and have proven “relatively more vulnerable” to growth downturns due to elastic revenues and rigid expenditures. However, although absolute debt levels have risen steadily, the government's debt-to-GDP ratio has been declining over the last few years, it said.
The agency’s assessment of low financial strength is based on expectation that the government’s debt and interest payment burden will continue to remain high, relative to its annual revenues over the medium-term.
Despite the stable outlook, Moody’s has cautioned that “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.”