Fiscal, structural reform policies to weigh on India's ratings: Moody's

Says GDP revisions not to determine sovereign credit profile

Global rating agency Moody's today said fiscal policies and structural reforms will determine India's sovereign credit profile, and not recent revisions to the economic growth data. 

While upward revision in India's economic growth highlights strength of economy, it does not impact overall assessment of the credit profile, Moody's said in its report on the Indian government. 

India's GDP growth in the fiscal year ended March 2014 is estimated at 6.9% under the new methodology, from 5% earlier. Growth estimates for the prior and the current year were also revised higher. 

Moody's said similar methodological updates have led to upward revisions in other economies as well, although the magnitude of the upward revision in India was relatively high, given the growth rate implied by other economic indicators. Nonetheless, even before the GDP revisions, India's average growth rate was higher than many similarly rated peers, it said. 

The newly released data underscores that India's high economic growth supports its sovereign credit rating of Baa3 with a stable outlook. But, it did not change ratios for government finances, private external leverage and bank asset quality, all of which continue to pose sovereign credit risks, said Moody's. 

The agency said times of both accelerating and decelerating growth, India's wide fiscal deficits, poor infrastructure and regulatory complexity have combined to create a mismatch between domestic demand and supply, contributing to inflation and current-account pressures.

In 2015, benign global oil prices are likely to keep India's inflation and current account pressures in check, Moody's added. 

This could allow for more accommodative monetary policy which, in turn, would revive investment growth. However, Moody's cautioned that lack of government action to reduce fiscal deficits and structural supply constraints, a pick up in domestic demand or rebound in global commodity prices could lead to renewed inflation and current account pressures over a 3-5 year horizon. 

Such a rise in macro-economic imbalances could trigger balance of payment pressures, particularly if international liquidity conditions were to tighten from current levels, as per the report.. 

Policies to address fiscal and supply side constraints will determine whether India's current growth momentum and macro-economic balance can be maintained over the coming years, it added.