Global rating agency Moody's today warned that India's financial strength has weakened due to its "poor debt affordability" and the country's fiscal policy predictability and credibility have also deteriorated.
While affirming its stable outlook for its 'medium-grade' foreign and local currency ratings for the country, Moody's said the 'stable outlook' has "recently faced growing pressure, mainly due to substantial deterioration in the fiscal position amid a rise in India’s dependence on foreign capital flows to drive its investment cycle."
Moody's said the country's poor fiscal fundamentals mainly result from "a deeply entrenched framework of subsidies and the Government's relatively weak expenditure restraint."
Besides, the much-needed fiscal reforms such as rationalisation of subsidies and reduction of price controls, as well as disinvestment, have not materialised, although these could help improve the Government's fiscal and debt positions.
"These have been impeded in the previous five years of the Congress-led governing alliance by the fractious nature of India's politics and a populist impulse in policy formulation," Moody's said in its annual report.
Finance Minister Pranab Mukherjee, while speaking to reporters on Wednesday for the first time after taking charge on Monday, had said the next round of stimulus for the economy would come through reforms and also hinted at pushing up the infrastructure spending.
Moody's also took note of the fact that the recent general elections have given "a landslide victory for the Congress-coalition" and the new Government would no longer rely on "obstructive left parties for parliamentary support."
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"This unexpected outcome provides scope for rationalising spending, pushing ahead with disinvestments, and key reforms. If the newly re-elected government proves able to quickly outline and sustain a credible program for reducing consolidated deficits, then the sustainability prospects for general government debt would improve," it added.
These trends could boost the outlook for the country’s local currency credit ratings. However, an inability to meaningfully adjust fiscal policies and push ahead with reforms could pressure the foreign currency credit rating, Moody's said.
So far, the country's policy framework remains focused on counter-cyclical measures and the Government's growing financing needs, in the midst of a modest weakening of foreign asset position, have already complicated the monetary management, it noted.
"India has a large, rapidly-growing and well-diversified economic structure, but the country also has a very low income per capita, sectoral imbalances, and inadequate social and physical infrastructure," the credit rating agency said.