Moody's retains 'Stable' outlook on India's ratings

However, it says govt finances are the 'weakest aspect of India's macro economic profile'

Contrary to its two peers--Standard & Poor's and Fitch--Moody's Investors Service has retained stable outlook on India's sovereign ratings at the lowest level in investment grade. It, however, said government finances are the "weakest aspect of India's macro economic profile."

"The stable outlook on India's rating balances Moody's assessment of its credit strengths and weaknesses, relative to other rated sovereigns," the rating agency said in its latest credit analysis on India. 

Moody's assigned India Baa3 ratings, which is the lowest category in the investment grade. Similarly, S&P and Fitch gave the same ratings to the country. However, S&P and Fitch downgraded outlook on these ratings, which indicate that there are chances of downgrade of these ratings to junk.

The news came as a relief to the Finance Ministry, struggling hard to convince the rating agencies to look at the promising parameters of India's economy.

Moody's counted India's potential GDP growth, robust savings rate and a dynamic private sector as positive strengths, and high fiscal deficit, debt ratios and supply constraints in the form of infrastructure, policy and administrative inefficiencies as constrain on credit profile.

"We expect India's relative strong savings and investment rates to sustain future growth," the rating agency said.

It said India's average GDP growth in the past decade has outperformed similarly rated economies.

On institutional strengths, Moody's included long tradition of checks and balances between the legislature, the judiciary and the executive. "Transparent monetary policy and vigilance in financial supervision also provide institutional support," it said.

However, it cautioned against slow policy-making and implementation as well as corruption.

On its assessment about government finances as the weakest aspect of India's credit profile, the agency said it is based on the government's high debt ratios and fiscal deficits.

"We expect the government's fiscal position to remain weaker than peers over the medium term," Moody's said.

However, thanks to high private sector savings rate, and the banking system that is mandated to hold a certain proportion of government securities, the government is able to finance its significant annual gross borrowing requirement domestically, and has also managed to extend the average maturity structure of its debt, it said.

Government debt is about 70 per cent of GDP, it said. "Lowering of this ratio from even higher levels over the last few years has been largely due to high inflation, rather than fiscal consolidation," it said.

The agency said the government's move to reduce fuel and fertilizer subsidies are too modest to compensate for high global commodity prices. However, it is not clear whether the agency had taken into account the recent moves by the government to hike diesel prices for retailers, charge market price for the bulk purchase and raise prices of unsubsidized LPG cylinders.

As Food Security Act is planned to be enacted in 2013, Moody's said reining in of fiscal deficit will depend on the extent to which growth revives in years to come as it would make the government kitty richer.

The government expects the Centre's fiscal deficit to touch 5.3 per cent of GDP in the current financial year against 5.7 per cent in 2011-12. However, economists believe that it would be anywhere in the range of 5.6-5.8 per cent.

Moody's said sustained fall in fiscal deficit and debt ratios and decline in their vulnerability to political risks would up the ratings, while deterioration of debt ratios, loss of international competitiveness and worsening of balance of payments position beyond the period of current global uncertainty would down the ratings.