Rating agency Moody\u2019s Investors Service has upgraded India\u2019s sovereign rating outlook to \u2018stable\u2019 from \u2018negative\u2019 citing an ebbing of the risks from COVID-19 and the negative feedback between the real economy and financial system. <\/p>\n
While it retained India\u2019s rating at Baa3, reflecting the lowest investment grade rating, Moody\u2019s said it expects real GDP to surpass pre-pandemic levels of 2019-20 this year itself, as the ongoing economic recovery is picking up steam with activity upticks broadening across sectors. It expects 2021-22 to record 9.3% growth in GDP, followed by 7.9% next year. <\/p>\n
In June 2020, Moody\u2019s had downgraded India\u2019s sovereign rating to Baa3 from Baa2 with a negative outlook. On Tuesday, it said that downside risks to growth from subsequent coronavirus infection waves are mitigated by rising vaccination rates and more selective use of restrictions on economic activity, as seen during the second wave. <\/p>\n
Moreover, higher capital cushions and greater liquidity suggests banks and non-bank financial institutions pose much lesser risk to the sovereign than Moody\u2019s previously anticipated. <\/p>\n
\u201cWhile risks stemming from a high debt burden and weak debt affordability remain, Moody\u2019s expects that the economic environment will allow for a gradual reduction of the general government fiscal deficit over the next few years, preventing further deterioration of the sovereign credit profile,\u201d the agency said. <\/p>\n
Over the medium term, Moody\u2019s expects real GDP growth to average around 6%, reflecting a rebound in activity to levels at potential as conditions normalize. \u201cThe growth projections take into account structural challenges, including weak infrastructure, rigidities in labour, land and product markets that continue to constrain private investment and contribute to post-pandemic economic scarring,\u201d it explained. <\/p>\n
The normalisation of growth levels will enable a \u2018gradual fiscal consolidation and stabilisation of the government\u2019s debt burden, albeit at high and above pre-pandemic levels\u2019, the rating agency said. <\/p>\n
However, Moody\u2019s said the higher debt burden and weaker debt affordability compared to pre-pandemic times is expected to persist, which is a key factor in its rationale for retaining the Baa3 rating as it would contribute to \u2018lower fiscal strength\u2019. <\/p>\n
This would offset India\u2019s recent strong points such as narrower current account deficits and historically high foreign exchange reserves that have reduced the country\u2019s vulnerabilities to external shocks. <\/p>\n
\u201cIndia\u2019s main credit challenges, its low per capita income and its weak fiscal position, which has been exacerbated by the coronavirus shock. India\u2019s general government debt burden increased sharply from 74% of GDP in 2019 to an estimated 89% of 2020 GDP, significantly higher than the <\/p>\n
Baa median of around 48%. Meanwhile, interest payments are about 26% of general government revenue, the highest among Baa-rated peers and more than three times the Baa median of 8%,\u201d it pointed out. <\/p>\n
\u201cLooking ahead, Moody\u2019s expects the debt burden to stabilize at around 91% over the medium term, as strong nominal GDP growth is balanced by a gradually shrinking, but still sizeable, primary deficit,\u201d the agency said in a statement.<\/p>\n
The upgrade in outlook to \u2018stable\u2019, Moody\u2019s said, was driven by the \u2018lower susceptibility\u2019 to event risk from \u2018a negative feedback loop between the financial sector and the real economy\u2019. <\/p>\n
\u201cSolvency in the financial system has strengthened, improving credit conditions which Moody\u2019s expects to be sustained as policy settings normalize. Bank provisioning has allowed for the gradual write-off of legacy problem assets over the past few years. In addition, banks have strengthened their capital positions, pointing to a stronger outlook for credit growth to support the economy,\u201d it averred. <\/p>\n
For an upgrade in the country\u2019s rating, Moody\u2019s said India\u2019s economic growth potential would have to increase \u2018materially beyond its expectations, supported by effective implementation of government economic and financial sector reforms that resulted in a significant and sustained pickup in private sector investment\u2019. <\/p>\n
\u201cEffective implementation of fiscal policy measures that resulted in a sustained decline in the government\u2019s debt burden and improvements in debt affordability would also provide support to the credit profile,\u201d it emphasised.<\/p>\n
The agency also flagged high negative risks for India on environmental and social considerations, stressing that a weak government balance sheet with relatively low income levels affect the sovereign\u2019s capacity to mitigate such risks.<\/p>\n
\u201cExposure to social risk is Highly Negative, driven by risks related to low and unevenly distributed incomes, unequal access to high-quality education, strains on housing, healthcare and basic services provision. While the government has invested in improving access to basic services, with demonstrated progress in sanitation and running water, around 15% of the population is undernourished and early-age mortality remains relatively high,\u201d it pointed out.<\/p>\n