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The UPA Government, which is at the receiving end of Opposition parties, allies and global credit agencies alike for slow GDP growth, policy paralysis and high inflation, can take heart from what Moody’s has to say.
The global credit rating agency has maintained its stable outlook on India’s rating.
Moody’s reasoned that various credit challenges – such as 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 current ‘Baa3’ rating.
In the last couple of months, rival agencies S&P and Fitch have changed the rating outlook on India to ‘negative’ from ‘stable’.
Moody’s observed that certain recent negative trends – such as lower growth, slowing investment and poor business sentiment – are unlikely to become permanent or even medium-term features of the Indian economy.
The rating agency, however, expects that global and domestic factors, including potential shocks in agriculture, could keep India’s growth below trend for the next few quarters.
Deficit
In assessing India’s Budget deficits, Moody's pointed out that the Government debt and fiscal deficit ratios have always been worse than those of similarly rated peers.
Moody’s said its 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.
The reasons for weak finances 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.
Rupee
On the issue of the rupee’s depreciation, Moody's said as the Government’s foreign currency debt comprises only 5.3 per cent of its total debt and is equivalent to 3.8 per cent of GDP, the rupee’s decline does not raise the Government’s own debt service burden significantly, especially since most of its foreign currency debt is owed to multilateral and bilateral creditors with low annual repayment requirements.
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