Moody's: Strong mandate won't be game changer for Indian credit

Moody's Investors Service says that the emergence of a strong coalition as a result of the upcoming general elections in India (Baa3 stable) would not act as a near-term game changer for Indian creditworthiness.

However, a fragmented government without either a clear mandate or policy platform would heighten downside credit risks.

As indicated, Moody's does not believe that a strong showing by one of the major parties would, by itself, translate into an immediate improvement in India's economic growth and fiscal consolidation, which are key determinants of the country's overall credit quality.

"Firstly, growth trends over the past few decades show little direct correlation with election outcomes. Secondly, the influence of external conditions on Indian growth is underappreciated, and developed country growth and global liquidity trends will be crucial determinants," says Rahul Ghosh, a Moody's Vice President and Senior Research Analyst.

Moreover, the increasing importance of regional parties will continue to hamper the efficacy of nationwide policymaking, regardless of the political complexion of the eventual central government.

"But, 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," says Ghosh.

Moreover, consensus building on fiscal consolidation would prove more challenging in a fragmented government.

In addition, the Moody's report highlights that Indian corporates and financial institutions are more exposed than the sovereign to further economic weakness.

While Moody's Indian sovereign rating continues to receive support from the existing structure and ownership patterns of government debt, Indian corporates will remain much more vulnerable to prolonged macroeconomic 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.

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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