High fiscal deficit, inflation woes limit India's chances of a rating upgrade, says Moody's

But it expects govt to meet the fiscal deficit target of 4.1% for FY15

Despite positive growth figures achieved by the economy in the first quarter, rating agency Moody’s on Wednesday said high fiscal deficit and sticky inflation limited chances of an upward revision in the country’s sovereign ratings.

“We forecast fiscal (deficit), inflation and infrastructure metrics to remain weaker than the median for similarly rated peers. While stronger growth in this large and diverse economy will help counterbalance these credit challenges, they limit further upward momentum in the sovereign rating,” Moody’s Investors Service said in a note issued from Singapore.

The comments come days after the government released the June quarter gross domestic product (GDP) numbers at 5.7 per cent and current account deficit at 1.7 per cent of GDP.

The government has committed a 4.1 per cent fiscal deficit target for the financial year, but has already exhausted over 61 per cent of the target in the first four months.

Inflation measured by the Consumer Price Index continues to be around eight per cent, with upward pressures being exerted by food prices due to weak monsoon.

The agency, which has a ‘Baa3’ rating with a stable outlook on the country, said the 5.7 per cent GDP print in the April-June period was in line with its “long-held view that growth deceleration to sub-five per cent levels over the past two years would reverse over time.”

The agency further said it was due to this view that it had maintained a “stable outlook” in spite of issues such as currency volatility, declining private and public investments and poor market sentiment (in the past two financial years due to adverse tax policies of the previous government).

Moody’s said the higher growth numbers in Q1 would help improve tax revenues and capital flows into the country, and could also help reverse the weakening metrics in the financial year and external position in recent years.

Additionally, Moody’s said the macroeconomic outlook would improve if the government was able to “implement policies that ease inflationary pressures and increase infrastructure investment.”

The finance ministry has been meeting representatives from rating agencies since mid-August to project the positives about the country.

After the release of official data showed a 5.7 per cent jump during the first quarter, coming after two consecutive financial years of sub-five per cent growth, Finance Secretary Arvind Mayaram had said he expected some positive action from the international rating agencies.