Moody's maintains stable outlook for India, cautions on political tensions

Moody's cautioned that a continued increase in the debt burden could weaken India's fiscal strength and put downward pressure on the rating

Global rating agency Moody's has affirmed India's outlook at Baa3 and P-3, signaling stability. However, it has issued a warning that escalating political tensions or further weakening of checks and balances could harm the country's long-term growth trajectory, according to a report by The Economic Times (ET).

Moody's highlighted India's vulnerability to event-driven risks due to mounting political and sectarian tensions alongside growing domestic political polarisation.

Despite these challenges, Moody's noted India's strong economic fundamentals, such as its high growth potential, sound external position, and low per capita income.

"India's fiscal metrics will continue to gradually improve amid robust growth prospects compared with peers. Upside risks to inflation and correspondingly higher interest rates could challenge efforts to rein in spending and exacerbate already weak debt affordability," said Moody's.  

 

Moody's also noted that the economic and social advantages of digitalisation could exceed current expectations. "Benefiting from traction on infrastructure development, digitalisation and the rehabilitation of the financial system, a stronger and more stable economy has emerged from the pandemic, although we do not expect a material reduction in debt amid gradual fiscal consolidation over the next year," Moody's stated.

Looking forward, Moody's foresees a rise in private investment following the 2024 Lok Sabha elections as uncertainties diminish and policy rates decline. "Private investment could rise as election-related uncertainties clear and policy rates start to fall as inflation normalises within the Reserve Bank of India's target band," said Moody's.

Moody's further said that India's debt affordability ratio is likely to remain weaker than other Baa-rated emerging markets, primarily due to its high debt burden and historically elevated interest rates. Nevertheless, the agency anticipates some stability, aided by largely domestic sources of financing. "Despite the buoyancy of revenue supported by reforms such as the implementation of the goods and services tax (GST) and digitalisation, debt affordability has been worsening over the past decade although it has eased somewhat since the peak of the pandemic," it said.

Moody's suggested that progress in fiscal consolidation leading to a decline in the government's debt burden and enhanced debt affordability could positively impact India's rating. However, it cautioned that a continued increase in the debt burden could weaken India's fiscal strength and put downward pressure on the rating.

Recently, Moody's revised India's real GDP growth projection to 8 per cent for the full fiscal year, citing robust contributions from gross fixed capital formation amid the authorities' ongoing emphasis on infrastructure development.