Despite positive growth figures achieved by the economy in the first quarter, rating agency Moody’s, on Wednesday, said high fiscal deficit and sticky inflation limit chances of an upward revision in the country’s sovereign ratings.
“We forecast fiscal (deficit), inflation and infrastructure metrics to remain weaker than the median for similarly-rated peers.
“While stronger growth in this large and diverse economy will help counterbalance these credit challenges, they limit further upward momentum in the sovereign rating,” Moody’s Investors Service said in a note issued from Singapore.
The comments come days after the government released the first quarter gross domestic product (GDP) numbers at 5.7 per cent and current account deficit (CAD) at 1.7 per cent of GDP.
The government has committed a 4.1 per cent fiscal deficit target for the fiscal, but has already exhausted over 61 per cent of the fiscal’s target in the first four months itself.
Inflation, measured by consumer price index, continues to skirt around the 8 per cent mark, with upward pressures being exerted by food prices due to weak monsoon.
The agency, which has a ‘Baa3’ rating with a stable outlook on the country, said the 5.7 per cent GDP print in the April-June period was in line with its “long-held view that growth deceleration to sub-5 per cent levels over the past two years would reverse over time.”
The agency further said it was due to this view that it had maintained a “stable outlook” in spite of issues such as currency volatility, declining private and public investments and poor market sentiment (in the past two fiscals due to adverse tax policies of the previous regime).
Moody’s said the higher growth numbers in the first quarter would help improve tax revenues and capital flows into the country, and could also help reverse the weakening metrics that had occurred in the fiscal and external position in recent years.
Additionally, Moody’s said the macro-economic outlook would improve if the government was able to “implement policies that ease inflationary pressures and increase infrastructure investment”.
The Finance Ministry has been meeting representatives from rating agencies since mid-August to project the positives about the country.
After the release of official data pointing to a 5.7 per cent jump during the first quarter, coming after two consecutive fiscals of sub-5 per cent growth, Finance Secretary Arvind Mayaram had said that he expected some positive action from the international rating agencies.