It said the outlook for India’s rating would improve if fiscal, inflation and infrastructure metrics improve were to move closer to median scores of similarly rated economies.
“On the other hand, the outlook would weaken with a further deterioration in the fiscal position, or rising contingent liabilities from the state-owned banking sector, or a material decline in foreign exchange reserves coverage of external debt and imports,” it said.
Moody’s, along with other Fitch and Standard and Poor’s, has assigned India lowest investment grading with stable outlook. The downgrade of outlook would mean negative and upgrade would mean positive.
However, India has been maintaining that its rating itself should be upgraded above lowest investment grade.
Moody’s, however, clarified that its annual credit analysis should not be taken as a rating action.
Pointing out that India’s low per capita incomes limit the tax revenue base and inflation is still higher than similarly rated economies, Moody’s said measures taken by the government and the Reserve Bank of India may appear modest in their near-term impact but these could enhance India’s operating environment and improve competitiveness. However, these have to be effectively implemented and augmented with additional structural reforms.
RBI has been refusing to cut policy rates due to upside risks to inflation, while the government has liberalised foreign direct investment regime in railway, defence and construction sectors to revive investment cycle and boost growth.
The other measures such as a bill to hike foreign investment in insurance, constitution amendment bill on GST, land acquisition bill, amendments to the companies law are expected to be tabled in the ongoing session of Parliament. However, Parliament has been facing continuous disruptions.
Pointing out that India’s high economic strength is a key source of
sovereign credit support, Moody’s said the gross domestic product growth, savings and investment rates exceed comparable emerging-market averages.
Although growth slowed significantly between 2011 and 2014, Moody’s expected it to accelerate from between 5-6 per cent over the next year to above 7 per cent thereafter. The growth projections are however subject to benign global economic and financial conditions and effective implementation of the government’s macro-economic and structural reform agenda.
India’s growth slipped to below five per cent in 2012-13 and 2013-14. However, it recovered to 5.5 per cent in the first half of the current financial year, in line with government expectations of 5.4-5.9 per cent expansion in the current financial year.