Moody's keeps India rating at Baa3 with stable outlook, flags fiscal risk

Moody's affirmed India's sovereign rating at Baa3 with a stable outlook, citing growth and external resilience but warning that high debt and weak affordability persist

Global credit-rating agency Moody’s on Monday affirmed its lowest investment grade (Baa3) rating for India along with a stable outlook, citing its fast-growing economy and sound external position, which are lending resilience to adverse external trends. 

 

“The US’ imposition of high tariffs (currently at 50 per cent compared to 15-20 per cent tariff rates applied to other APAC countries) will have limited negative effects on India’s economic growth in the near term. However, it may constrain potential growth over the medium to long term by hindering India’s ambitions to develop a higher value-added export manufacturing sector. At this stage, we expect subsequent negotiations to result in less punitive rates and domestic market-oriented foreign investment to remain robust,” the rating agency said.

 

This comes a month after Fitch Ratings maintained India’s sovereign rating at its lowest investment-grade level (BBB-) with a stable outlook.

 

However, last month, S&P Global Ratings had upgraded India’s sovereign rating by one notch to BBB from BBB-, while keeping the outlook stable, in its first rating upgrade of the country in 18 years. 

 

Moody’s said it could upgrade India’s credit profile if there was a material improvement in the affordability of the country’s high debt burden to levels more consistent with higher-rated peers.

 

“The effective implementation of structural reforms that results in a significant pickup in private sector investment, faster growth in GDP (gross domestic product) per capita and broader economic diversification, for instance in higher value-added manufacturing or digital services, would support stronger assessments of policy effectiveness and the credit profile,” it added.

 

However, Moody’s cautioned that India’s sovereign rating could face downward pressure, which would stem from weaker growth than currently projected or a reversal in recent gains from fiscal consolidation, which would contribute to materially higher debt and a significant worsening in debt affordability.

 

“In addition, a resurgence of financial sector stress that is unlikely to be addressed promptly and effectively would also put downward pressure on the rating,” it said.

 

The agency noted India’s credit strength was balanced by “long-standing weaknesses” on the fiscal side, which is expected to remain. 

 

“Strong GDP growth and gradual fiscal consolidation will lead to an only very gradual decline in the government's high debt burden, and will not be sufficient to materially improve weak debt affordability, especially as recent fiscal measures to reinforce private consumption erode the government's revenue base,” it noted.

 

The government has estimated its fiscal deficit for this financial year at 4.4 per cent of GDP.  

 

The rating agency said India’s consolidation of the large deficits at general government level had been “very gradual”, despite robust growth-boosting revenue and alleviating spending pressure since exiting the pandemic in 2022.

 

“Moreover, while the government has demonstrated a lengthening track record of fiscal consolidation, recent policy measures have signaled a shift towards greater support for the economy amid a weaker global macroeconomic environment. To enhance private consumption, the government increased income tax thresholds, as well as announced the consolidation of GST rates. These developments have narrowed the tax base and will result in foregone revenue, thus curtailing potential improvements in debt affordability,” it noted. 

 

Nevertheless, it expects the government to remain committed to its goal of gradual debt reduction over the next decade, which implies limited risks of significant reversals to gains in fiscal consolidation since India emerged from the pandemic.