Home / Politics / Policy /  Moody’s unlikely to upgrade India’s sovereign rating

A day before its meeting with finance ministry officials, Moody’s Investor Service indicated on Tuesday it is unlikely to upgrade India’s sovereign credit rating anytime soon.

It said the credit implications of reform measures such as the goods and services tax (GST) and a bankruptcy law will only become apparent in the medium term while weak private investments, slower fiscal consolidation and a high-level of bad loans in the banking sector constrain India’s sovereign rating.

Moody’s currently has assigned the lowest investment grade (Baa3) for India with a positive outlook.

“Over time, the multi-pronged but step-wise approach to reform will foster a stable macro-economic environment. In particular, the cementing of the monetary policy framework with the objective of maintaining inflation at moderate levels is credit positive. Moody’s expects continuity in monetary policy which is credit positive," Marie Diron, senior vice-president, Moody’s Sovereign Group, told reporters.

Separately, a statement by Moody’s said that while bad asset recognition is a first step, it does not strengthen the resilience of banks and therefore does not reduce the contingent liability risks for the sovereign. “Moody’s estimates that the fiscal costs of equity injections in public sector banks are manageable, although they are larger than currently budgeted and will add to the government’s challenge in meeting its fiscal targets," it added.

Diron said though there is progress in the implementation of reforms, what the rating agency didn’t anticipate is the weakness in private investment. “If corporates do not see improvement in business environment and greater credibility in the reforms process, that may be one of the reasons why investment is not picking up," she added.

While a large and diversified economy with robust GDP growth supports India’s positive rating outlook, Moody’s said inadequate infrastructure puts a constraint to it. Similarly, while increasing monetary and fiscal policy transparency supports institutional strength in the economy, slow policy implementation and corruption in some sectors proves a drag in its credit profile. A high debt burden and narrow revenue base are a clear redline in India’s credit profile although large domestic savings maintain financing costs at moderate levels.

“India high debt-to-GDP ratio at 67% is unlikely to come down below 65% in next few years. It is a constraint on India’s rating because this shows government has limited fiscal space to offset any future shock to the economy. In terms of fiscal consolidation, we don’t see rapid decline in that burden," Diron said.

Diron said if at all, a rapid fall in fiscal deficit is likely to come from stronger nominal GDP than currently envisaged. “It is difficult to come from purely fiscal perspective such as through increased revenue or reduced spending," she added.

However, in the medium term, what could disturb the fundamental view of India’s credit profile is the public sector dominated banking sector with a high level of bad debt, Diron said. “It is not so much about government’s capacity to inject liquidity into the banking system, but if it goes without reforms, then it is likely that in a few years down the line another injection would be needed. There could be contagion in some cases and confidence in the system may be undermined if that injection happens without necessary reforms," she added.

Diron said Moody’s sees pressure from “one side or the other" potentially emerging in the next one to two years. “That’s the kind of time horizon we give to investors. Our rating monitoring is ongoing. Any tangible change in any of the areas could prompt a change in rating," she added.

Moody’s pointed out that some measures, if effectively implemented, will bolster India’s growth potential. These include easing of restrictions on foreign direct investment that could foster productivity growth in some sectors. “The bankruptcy law, which, if credible, would enhance investor confidence, improved access to bank accounts and measures aimed at easing business starts," Moody’s said.

ICRA, Moody’s affiliate in India, has projected the economy to grow at 7.9% in 2016-17 from 7.6% a year ago.

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