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Ratings agency Moody's on Tuesday said the emergence of a strong coalition after the results of the Lok Sabha elections would not act as a game changer in the near term for India’s creditworthiness.
However, a fragmented government without either a clear mandate or policy platform would heighten downside credit risks, it warned. The agency has pegged India’s rating at “Baa3 stable”.
Moody's said a strong showing by one of the major parties, by itself, would not translate into an immediate improvement in India's economic growth and fiscal consolidation. These two factors are key determinants of the country's overall credit quality.
Firstly, growth trends over the past few decades show little direct correlation with election outcomes. Secondly, the influence of external conditions on Indian growth is under-appreciated. The developed country growth and global liquidity trends will be crucial determinants, said Rahul Ghosh, a Moody's Vice President and Senior Research Analyst. Moreover, the increasing importance of regional parties would continue to hamper the efficacy of nationwide policymaking, regardless of the political complexion of the eventual central government, Moody’s said.
The ratings agency said if a coalition of smaller, regional parties without a common economic reform agenda were to take the helm, it would most likely provoke further capital flight. This could increase borrowing costs and weaken the Indian rupee, and delay economic recovery.
Moreover, the consensus building on fiscal consolidation would prove more challenging in a fragmented government. Indian companies and financial institutions are more exposed than the sovereign to further economic weakness.
While Moody's Indian sovereign rating continues to receive support from the existing structure and ownership patterns of government debt, Indian companies will remain much more vulnerable to prolonged macroeconomic weakness. Such vulnerability is due to the aggressive run-up in corporate leverage and the greater exposure to external debt that has built up in recent years.
Indian banks, meanwhile, would feel the pinch of a weak corporate environment via deteriorating asset quality.
The public sector banks are more vulnerable than private-sector banks to the risk of a fragmented government leading to prolonged macroeconomic malaise.
PSBs have greater exposure to lending to higher risk and poorer performing sectors. And they are on average more weakly capitalised than their private sector peers, it said.
