Moody's Investors Service reaffirmed India's ratings even as it cut the country's growth forecast.
Moody's reaffirmed India's ratings at Baa3 with a stable outlook, according to its media statement. “The credit profile of India reflects key strengths including its large and diversified economy with high growth potential, a relatively strong external position, and a stable domestic financing base for government debt.”
We do not expect rising challenges to the global economy, including the impact of the Russia-Ukraine military conflict, higher inflation, and the tightening financial conditions on the back of policy tightening, to derail India's ongoing recovery from the pandemic in 2022 and 2023.Moody's Investors Service
“The stable outlook reflects our view that the risks from negative feedback between the economy and financial system are receding,” it said.
With higher capital buffers and greater liquidity, banks and non-banking financial institutions pose much less risk to the sovereign than previously anticipated, facilitating the ongoing recovery from the pandemic.
Principal credit challenges, according to Moody's, include low per capita income, high general government debt, low debt affordability and limited government effectiveness.
“While risks stemming from a high debt burden and weak debt affordability remain, we expect that the economic environment will allow for a gradual narrowing in the general government fiscal deficit over the next few years, avoiding further deterioration in the sovereign credit profile.”
Moody's could upgrade India's rating if economic growth potential increased materially beyond 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, it said.
Factors that could lead to a downgrade are weaker economic conditions than currently expected that point to lower growth over the medium term and a resurgence of financial sector risks that would put downward pressure on the rating. Slower growth than projected would contribute to a continued rise in the debt burden, which could weaken the sovereign's fiscal strength further and lead to a negative rating action, it said.
This came after the ratings agency lowered its India GDP growth forecast to 7.7% for 2022 from 8.8% projected in May, when it had cut the estimate from 9.1%.
Climate Change Risks
“We consider India's economy to be highly exposed to climate change risks,” the note said. The magnitude and dispersion of seasonal monsoon rainfall vary each year and influence agricultural sector growth, food price inflation and consumption, particularly given that half of India's overall consumption comes from the rural sector and many rural incomes are dependent on agriculture, the note cautioned.
“While rising, India's still low incomes limit households' capacity to absorb shocks, whether domestic, external or weather related,” the note said. This could exacerbate stresses from uneven distribution of income given the large proportion of the labor force employed in the informal sector, and in agriculture, underscoring the persistence of social risks.
Fiscal Strengths
Prospects for India's debt burden to materially decline over the medium term will depend significantly on trends in nominal GDP growth. “Under average nominal GDP growth of around 13% and our expectation of only gradual fiscal consolidation between fiscal 2022 and fiscal 2024, we expect debt to stabilise around 80% of GDP, still significantly higher than the Baa-rated peer median of around 55%,” the note said.
Meanwhile, debt affordability is expected to remain weak over the same period with interest payments at over 25% of general government revenue, the highest among Baa-rated peers and almost three times the Baa-rated median of around 8.8% as of 2021. At the same time, India's stable domestic financing base mitigates fiscal risks posed by high government debt and weak debt affordability.
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