India's vulnerability to drought poses credit challenges: Moody's

Could lower GDP growth, push inflation and add to fiscal pressures, says the rating agency

Global rating agency Moody's today said that India'sovereign credit profile is more exposed to the negative effects of drought than those of most Baa-rated sovereigns.

India carries Baa3 positive rating.

Although India may avoid drought this year, its economy remains vulnerable to future droughts or fluctuations in rainfall, Moody's said in statement.

The efforts at the central and state government level to improve rural infrastructure, food distribution and non-agricultural employment opportunities are credit positive. If these efforts are sustained, they are likely to lower the credit challenges that India's vulnerability to drought poses, it added.

Its report "India, Government of: Vulnerability to Drought Poses Credit Challenges" compares India to other countries in which agriculture has a material share of GDP. The report concluded that the Indian economy's vulnerability to drought stems from the combination of five factors.

The relatively high share of agriculture in overall employment; weak rural infrastructure and irrigation and inefficient food distribution are amogst these factors. The large proportion of Indian household spending that goes towards food and the share of food subsidy costs in the government's fiscal deficit also have their share in vulnerabilities, Moody's said.

Consequently, drought can simultaneously lower GDP growth, raise inflation and add to fiscal pressures. This leaves India's sovereign credit profile more susceptible to the effect of drought compared to those of other Baa-rated sovereigns.

Moreover, India's economic exposure to annual fluctuations in rainfall constrains the ability of monetary policy to respond to ongoing macro-economic developments. This is particularly so in years such as the current one when a weak monsoon forecast coincides with an uncertain cyclical recovery, it added.