News

Published: August 18, 2023
Updated: August 18, 2023

India's Resilient Economy Faces Fiscal and Political Challenges, says Moody's

Moody's Investors Service has upheld India's long-term local and foreign-currency issuer ratings at Baa3, maintaining a stable outlook. While acknowledging India's robust economic growth and resilience, Moody's highlighted concerns related to the country's "high debt burden" and constraints on political dissent.

Economic Growth and Political Landscape:

Despite the affirmation of India's Baa3 rating, Moody's noted the impact of "curtailment of civil society and political dissent" along with increasing domestic political risks. This rating is reflective of a steady domestic-currency senior unsecured rating at Baa3 and a P-3 short- term local-currency rating.

Rapid Growth Amidst Challenges:

Moody's emphasised India's potential to sustain rapid economic growth compared to international standards, although acknowledging a decline in potential growth over the past decade. The country's high gross domestic product (GDP) growth is anticipated to elevate income levels and bolster overall economic resilience, facilitating gradual fiscal consolidation despite elevated government debt levels.

India's G20 Economic Dominance:

Moody's positive outlook expects India to surpass all other G20 economies in terms of economic growth for at least the next two years, primarily driven by robust domestic demand.

Financial Sector Progress:

The report highlighted the strengthening of India's financial sector, mitigating previous downward rating pressures stemming from economic and contingent liability risks.

Fiscal Strength and Challenges:

While acknowledging India's fiscal consolidation over the past two years, buoyed by effective tax revenue collection mechanisms like the Goods and Services Tax (GST), Moody's pinpointed fiscal strength as a key concern. The report noted that high nominal GDP growth, coupled with ongoing fiscal consolidation, will help stabilise government debt at elevated levels.

Political and Social Risks:

Moody's cautioned about the curtailment of civil society and political dissent, compounded by sectarian tensions, which contributed to a weaker assessment of political risk and institutional quality. The eruption of unrest in Manipur, along with the prevailing socioeconomic risks such as poverty, income inequality, and unequal access to education and services, underscored the challenges.

Risk of Populist Policies and Border Tensions:

Moody's underscored the risk of populist policies due to elevated political polarisation and ongoing domestic political tensions. Additionally, the periodic flare-ups of border tensions with neighbouring countries were noted as outliers among countries with lower susceptibility to political risk.

Stable Outlook and Gradual Fiscal Improvement:

Despite the challenges, the stable outlook considers India's gradual fiscal improvement against the backdrop of robust growth prospects compared to its peers.

Moody's recognizes India's impressive economic growth potential and resilience but raises concerns regarding its high debt burden, constraints on political dissent, and potential for populist policies. While India's economic prowess is expected to continue, addressing the fiscal and political challenges will be crucial for sustained growth and stability.