New Delhi: International rating company Moody’s Investors Service said on Tuesday that the outlook on India’s sovereign rating is stable, supported by economic strengths that outweigh weaknesses, delivering a surprising and unexpected prognosis that offered a ray of hope for an economy confronted by slowing growth and obstinately high inflation.
Some economists questioned Moody’s optimism even as investors cheered the credit analysis by the firm, which followed warnings by rivals Standard and Poor’s and Fitch that India’s sovereign ratings risk being lowered to junk status unless the government acts to cut its fiscal deficit and tackles other shortcomings in the economy.
The rupee rose by 0.49% to end the day at 55.46 against the dollar after touching an intraday high of 55.44 during the session, or 0.52% up over the previous close of 55.73. The Indian currency fell to a two-and-a-half-month low of 55.88 per dollar on Monday. The BSE’s benchmark Sensex index gained 1.6% to 18,842.08 points.
Moody’s listed “a large, diverse economy, strong GDP (gross domestic product) growth as well as savings, and investment rates that exceed emerging market averages” among key economic strengths supporting India’s Baa3 rating, the lowest investment grade assigned by the US-based credit assessor.
“The rating is constrained by the credit challenges posed by India’s poor social and physical infrastructure, high government deficit and debt ratios, recurrent inflationary pressures, and an uncertain operating environment,” the rating company said.
Still, expectations are that India’s structural strengths will boost the GDP growth rate from around 5.4% in the current fiscal to 6% or higher in the following year, “with this higher growth improving fiscal and balance of payments metrics”, Moody’s said.
The rating company’s forecast is also based on the premise that there will be a cautious reduction in monetary policy rates by the central bank and further measures by the government to revive investor sentiment.
Standard and Poor’s wasn’t so optimistic. Last month, the company warned that India still faced a one-in-three chance of a credit rating downgrade over the next two years.
India’s economic growth has been slowing. It fell to a nine-year low of 5.3% in the quarter to 31 March and rose slightly to 5.5% in the subsequent three months. India’s headline inflation, based on the Wholesale Price Index, was 7.45% in October, far above the central bank’s comfort zone, while retail inflation stayed near double digits at 9.75%.
Since September, the government has taken steps to attract foreign investment and rein in its fiscal deficit. The United Progressive Alliance government allowed foreign investment in multi-brand retail, relaxed conditions on investment in single-brand retail, and permitted foreign airlines to invest in local airlines. The cabinet has also increased the foreign investment limit in insurance joint ventures.
The coalition government raised the price of diesel and capped the supply of subsidized cooking gas to six cylinders per household to reduce its spending on subsidies.
“The hyperactivity on the government front was superficial. The government announced a slew of measures but there has been no forward movement”, said V. Anantha Nageswaran, co-founder of Aavishkaar Venture Fund and think tank Takshashila Institution. “After the state elections in December, the political situation could become fluid and fiscal consolidation may become the government’s last priority,” added Nageswaran, also a columnist for Mint.
He said Moody’s may have been a bit too optimistic about India’s growth prospects. “Apart from the companies in the IT (information technology) sector, there are not many private companies that are globally competitive as infrastructure failures lead to high input costs,” he said. “For private sector growth, infrastructure and a transparent and stable policy framework are important.”
Last month, finance minister P. Chidambaram said India will contain its fiscal deficit to 5.3% of GDP in 2012-13, higher than the budget estimate of 5.1%, but lower than the 6% predicted by private economists.
But the target may be difficult to achieve given that the second-generation telecom spectrum auction this month only raised a quarter of the Rs.40,000 crore that had originally been expected, and investor response to stake sales in state-owned companies has been tepid.
The recent stake sale in Hindustan Copper Ltd, a public sector undertaking, was bailed out by state owned Life Insurance Corporation of India and other public sector banks, an indication that the government’s divestment target of Rs.30,000 crore may be far-fetched.
“There will definitely a slippage on the fiscal deficit front. The growth will be lower than what was estimated, and subsequently tax collections will also be lower,” said Krishnamurthy Subramanian, an assistant professor of finance at the Indian School of Business. “But the government may be able to push through its reform measures given that the opposition is splintered.”
Reuters contributed to this story.