New Delhi: Moody’s Investors Service Inc. on Monday retained a stable outlook on India’s credit rating despite slowing economic growth and accelerating inflation.
A weak fiscal position, inflation and an uncertain investor climate have been synonymous with the Indian economy for long and are unlikely to have any long-term impact on the country’s credit rating, according to the rating agency. India is rated Baa3 by Moody’s, the lowest investment grade rating.
Moody’s announcement follows a lowering of India’s outlook to negative from stable by two other rating agencies—Standard & Poor’s (S&P) and Fitch. Both the companies had said that slowing gross domestic product (GDP) growth and lack of credible steps for fiscal consolidation present significant risks to the Indian economy.
In comparison: Moody’s Investors Service Inc. headquarters in New York. Moody’s says the Indian government’s debt and fiscal deficit ratios have always been worse than those of similarly rated peers. Photo: Bloomberg
While India’s growth slowed to a nine-year low of 5.3% in the fourth quarter of the 2011-12 fiscal year, wholesale price inflation accelerated to 7.55% in May while retail-level inflation has been above the double-digit mark in April and May.
India’s GDP growth is expected at 6.5-7% in 2012-13.
“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 said in a statement.
The rating agency added that recent negative trends such as lower growth, slowing investment and poor business sentiments are unlikely to become permanent or even medium-term features of the Indian economy. But global and domestic factors, including potential shocks in agriculture, could keep India’s growth below trend for the next few quarters, Moody’s warned.
While S&P and Fitch were critical of India’s fiscal consolidation plan, Moody’s pointed out that the Indian government’s debt and fiscal deficit ratios have always been worse than those of similarly rated peers.
S&P had recently said that India could be the first among the so-called BRIC (Brazil, Russia, India, China) nations to have its investment-grade rating lowered to junk status because of slower growth, ballooning deficits and political roadblocks to economic policymaking.
A higher subsidy bill and lower tax revenue resulted in India’s fiscal deficit widening to 5.8% of GDP in 2011-12, from the initial estimate of 4.6%. India is targeting a fiscal deficit of 5.1% of GDP in this fiscal year. But, economists point out, that given the lack of credible steps to limit its fuel subsidy bill, the government may find it difficult to keep expenditure on this at less than 2% of GDP. India’s current account deficit has also been widening on account of high fuel prices and a large gold import bill, and is expected to be around 4% of GDP in 2011-12.
On the issue of the rupee’s depreciation, Moody’s said that it will not have a major impact on the government’s foreign currency debt service burden as it comprises only 5.3% of its total debt.
“The overall message from all the rating agencies is the same. All emphasize that the government should take steps to push forward with long pending reforms,” said Soumya Kanti Ghosh, director of economics and research at industry lobby group Federation of Indian Chambers of Commerce and Industry. “Moody’s may have opted to adopt a wait-and-watch approach before deciding to change India’s outlook.”