Global rating agency Moody’s, Friday, retained India’s rating, maintaining a stable outlook and projecting over 6% growth over the next two fiscal years.
“The credit profile of India balances its large and diversified economy with high growth potential, a relatively sound external position, and a stable domestic financing base for government debt against high general government debt, weak debt affordability and low per capita income,” Moody’s said.
The rating agency kept the country’s long-term and short-term ratings unchanged at Baa3 and P-3, respectively, as it predicted a gradual improvement in fiscal metrics amidst robust growth prospects.
In its last budget before elections, the government reiterated its commitment to bringing the fiscal deficit down to 4.5% of GDP by FY26. The fiscal deficit target for the current fiscal year is set at 5.1%.
Moody’s predicted the Indian economy grew 8% in FY24, higher than the 7.6% projected by the government. It noted that the ongoing infra push helped growth.
Investment has been one of the primary growth drivers, recording double-digit growth in FY24.
The rating agency noted that investment could receive further fillip in the coming year due to a revival of private spending, which could push growth further.
“There are upside risks to the projections, based on the potential for private consumption to benefit from ongoing disinflation, while 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,” it said.
Experts have been pencilling in a rate cut from the Reserve Bank of India in its June or August meeting. The RBI’s monetary policy committee kept rates on hold for the seventh consecutive time at its meeting earlier this month.
The rating agency noted that a material decline in debt burden could exert upward pressure on ratings.
“This would likely entail the effective implementation of new and existing structural reforms that resulted in a significant pickup in private sector investment, higher GDP per capita and broader economic diversification, for instance, in higher value-added manufacturing or digital services,” it said.
But Moody’s pointed out that inflationary pressures, political tensions and/or a further weakening of checks and balances that would undermine India’s long-term growth potential could push rating downward.
On the other hand, it also pointed out that the economic and social benefits of digitalisation could also be larger than currently assumed.
On the environmental front, Moody’s assigned a ESG credit impact score of 4 to the government, given its low resilience to environmental and social risks.
“These challenges constrain a more rapid expansion of manufacturing and consequently faster increases in GDP per capita, while contributing to social welfare spending,” it said.
