Moody's Maintains 'Baa3' Rating On India, Warns Of Political Issues

Moody’s Investors Service on Friday affirmed its ‘Baa3’ rating on India and kept the stable outlook. However, it has warned of domestic political issues.

“The Baa3 rating and stable outlook also take into account a curtailment of civil society and political dissent, compounded by rising domestic political risk,” Moody’s said in a statement on Friday.

It said the curtailment of civil society and political dissent, compounded by rising sectarian tensions, supports a weaker assessment of political risk and the quality of institutions.

“Although elevated political polarisation is unlikely to lead to a material destabilisation of government, rising domestic political tensions suggest an ongoing risk of populist policies — including at the regional and local government levels — amid the prevalence of social risks such as poverty and income inequality, as well as inequitable access to education and basic services. Moreover, the periodic flaring of border tensions with neighbouring countries was an outlier among sovereigns assessed as having a lower overall susceptibility to political risk,” it added.

Moody’s expects high nominal GDP growth and ongoing fiscal consolidation to stabilize the government debt burden at high levels. Despite some upside pressures on spending to help the economy cope with higher inflation, the government has been able to meet its fiscal deficit targets at the central government level over the past two years, aided by buoyant tax revenue, it said.

Moody’s said even as the narrowing fiscal deficit demonstrates ongoing government’s commitment to longer-term fiscal sustainability, it remains wider than Baa-rated peers.

“Moreover, in the absence of more material gains in revenue, the central government will be challenged to achieve its fiscal deficit target of 4.5 per cent of GDP for the fiscal year beginning April 2025 (fiscal 2025) from 6.4 per cent in fiscal 2022. Consequently, Moody’s projects general government debt to stabilise at around 80 per cent of GDP over the next two to three years, lower than the peak of almost 90 per cent reached in fiscal 2020 but higher than many similarly-rated sovereigns,” Moody’s said.

In addition, interest payments on India’s large debt burden will remain the highest relative to revenue among similarly-rated peers. Moody’s expects global and domestic interest rates to remain at the current high levels for the foreseeable future which precludes a greater improvement in debt affordability despite some indications of greater revenue buoyancy than in the past, it said.

“Given the weak starting points with regards to the deficit and debt levels, any reduction in India’s debt burden will continue to entail both fiscal consolidation and robust nominal GDP growth,” Moody’s said in the statement.