Moody’s Investors Service says that it is maintaining its stable outlook on India’s rating as various credit challenges, including the country’s weak fiscal performance, tendency towards inflation and an uncertain investment policy environment, have characterised the Indian economy for decades, and are already incorporated into the Baa3 rating currently allocated by the agency.
Moody’s adds that certain recent negative trend, such as lower growth, slowing investment and poor business sentiment, are unlikely to become permanent or even medium-term features of the Indian economy, although the agency expects that global and domestic factors, including potential shocks in agriculture, could keep India’s growth below trend for the next few quarters. The agency adds that its ratings express a view on medium-term sovereign creditworthiness and do not generally change with fluctuations in growth related to the direction of the business cycle at a particular point, if Moody’s believes growth will recover and sustain over time.
Furthermore, the impact of lower growth and still-high inflation will deteriorate credit metrics in the near term, but not to the extent that they will become incompatible with India’s current rating, Moody’s says in its report ‘Frequently Asked Questions about India’s Sovereign Rating’.
In assessing India’s budget deficits, Moody’s comments that government debt and fiscal deficit ratios have always been worse than those of similarly rated peers and that its own assessment of low government financial strength is based not merely on a comparison of ratios, but also on the underlying reasons for weak government finances. These lie in the role fiscal policy plays in maintaining social stability in a highly diverse, poor and unequal society, which limits government revenues and imposes demands on government expenditure. This poverty constraint is effectively factored into the rating by assigning India a ‘moderate’ economic strength assessment, despite the well above global average size and growth rates of its economy.
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