India's Domestic Political Risk Greater Than Peers, Says Moody's

Domestic political risk, enhanced by freebies and the old pension scheme, is higher in India than comparable countries, according to Moody's Investor Services.

"You are seeing that state governments are campaigning on freebies. Opposition governments that are coming into power in certain states are reversing their position with regard to pension systems, reverting to old defined benefit systems, which are fiscally negative," Christian De Guzman, senior vice president-sovereign ratings group, Moody's Investor Services, said in an interview with BQ Prime.

On Aug. 18, Moody's reaffirmed India's sovereign rating at Baa3, which is the lowest investment grade. The rating agency also retained its 'stable' outlook for India's sovereign rating.

While the rating agency maintained that India's economic growth was relatively high, its growth potential has been coming down over the last seven to 10 years. It also highlighted India's fiscal strength as a key weakness.

Among other reasons it listed for maintaining India's credit rating, Moody's said that India was seeing curtailment of civil society and political dissent, which was being compounded by domestic political risks.

"We have had an example in a relatively recent past of very well-meaning agricultural reforms being reversed by street protests. Yet another manifestation of domestic political risk that we do not see in peers, which we previously assessed with the same political risk score," Guzman said.

Some of the peers reviewed in this context included Switzerland, Ireland, Andorra, and Costa Rica.

"It is clear that the domestic political risk situation in those countries is more stable than what we see in India," Guzman said. Further, geopolitical risk in India is also higher than peers.

"In none of the countries I had mentioned do we have actual tensions with neighbouring countries. The tensions that we have with Pakistan and China often escalate into actual physical conflict," he said.

However, Moody's does not see any meaningful risks emanating from leadership change or regime instability in India. Guzman said the rating agency expects the Narendra Modi-led National Democratic Alliance to hold its seat in power in the upcoming general elections.