The significant parliamentary majority won by the Bharatiya Janata Party (BJP)-led National Democratic Alliance in India (rating: Baa3, stable outlook) is likely to sustain the investor sentiment which has recently boosted equity indices and the rupee, says Moody's Investors Service.
However, Moody's noted that the impact of today's election results on the country's credit profile will only be apparent over the next several months, as economic policy measures are implemented.
The global credit rating agency said while policy measures to revive the economy are likely over the coming months, India's growth, fiscal, and inflation metrics are unlikely to improve immediately. In the medium term, the extent to which they do will depend on the specific measures adopted by the new government as well as the pace of their implementation.
Economic trends will take longer to improve than sentiment did. Economic data published so far this year reveals that the industrial output is still weak (it declined by 0.5 per cent on an annual basis in March). Moreover, inflation remains elevated (at 8.6 per cent in April), limiting the scope for monetary stimulus to revive growth.
Industrial momentum
Nonetheless, industrial momentum could pick up in the second half of the year, as stalled investment resumes and consumer confidence increases, said the agency.
“We expect GDP growth to continue to be below potential, at about 5 per cent this year, and the possibility of a sub-par harvest due to El Nino effects poses downside risks,” said Moody’s.
Policy actions
The rating agency observed that India's GDP growth rate has been higher than many peer countries averages even during the slowdown of the last two years. However, its fiscal metrics, inflation performance and infrastructure are all weaker than those of other “Baa”-rated countries.
India's relatively high fiscal deficits fuel inflationary pressures and raise private sector borrowing costs. Meanwhile, regulatory restrictions that discourage investment pose supply constraints that curtail growth and underpin recurrent inflationary pressures.
Ín addition, limited financing options and high project implementation risks have inhibited the development of India's infrastructure.
Sovereign credit profile
As a result, changes in India's sovereign credit profile do not hinge upon GDP growth alone. Rather, future assessments of the sovereign credit profile will depend on developments in the following areas: the government's fiscal position; the regulatory constraints on investment and output; and growth in social and physical infrastructure.