The emergence of a strong government post elections in India would not act as a near-term game changer for Indian creditworthiness, Moody's Investors Service said on Tuesday. Moody's warning could be a dampener for investors who expect a turnaround in the India growth story post elections due by May 2014.
India is growing at the slowest pace in a decade and the persistently high and sticky inflation has forced the central bank to push interest rates higher, further impacting growth. High fiscal deficit may force the finance minister to cut spending in the current quarter, which is likely to weigh on growth, analysts say.
Many analysts have blamed the government's policy paralysis for the economic mess and some tied the fortunes of the economy with the emergence of a stable government post elections.
Rahul Ghosh, Moody's vice president and senior research analyst, says growth trends over the past few decades show little direct correlation with election outcomes.
"The influence of external conditions on Indian growth is underappreciated, and developed country growth and global liquidity trends will be crucial determinants," Moody's said.
A stable government might not lead to immediate results, but a fragmented government would heighten downside credit risks, Moody's added.
"If a coalition of smaller, regional parties without a common economic reform agenda were to take the helm, it would likely provoke further capital flight, thereby increasing borrowing costs and weakening the Indian rupee, and delaying economic recovery," Mr Ghosh said.
Moreover, consensus building on fiscal consolidation would prove more challenging in a fragmented government, he added.
Moody's report also highlighted that Indian corporates and financial institutions are more exposed than the sovereign to further economic weakness. Moody's believes that such vulnerability is due to the aggressive run-up in corporate leverage and the greater exposure to external debt that has built up in recent years.
Indian banks, meanwhile, will feel the pinch of a weak corporate environment via deteriorating asset quality, it said. The report further notes that public-sector banks are more vulnerable than private-sector banks to the risk of a fragmented government leading to prolonged macroeconomic malaise, because of their greater exposure to lending to higher risk and poorer performing sectors. And they are on average more weakly capitalized than their private sector peers.
Of the corporates rated by Moody's, steel and mining companies -- such as Tata Steel (Ba3 negative) and Vedanta Resources (Ba1 negative) -- are particularly exposed to downside election risks, given their generally high leverage ratios and sensitivity to the policy environment.
Refiners -- such as Indian Oil Corporation Ltd (Baa3 stable) and Bharat Petroleum Corporation Limited (Baa3 stable) -- also face election-related uncertainty over the reimbursement of energy subsidies.
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