At a time when Standard & Poor’s and Fitch have cautioned India on the possibility of cutting its sovereign rating to junk, Moody’s Investors Service today said the economy’s investment grade sovereign rating was stable. This, it said, was supported by India’s high investment, savings rates and growth outlook. Moody’s current rating for India is ‘Baa3’, lowest in the investment grade.
It clarified today’s statement wasn’t a rating action but an annual update to markets.
In its credit analysis, Moody’s said India’s rating of Baa3 was weighed down by poor infrastructure, low per capita income, high government deficit and debt ratios, a complex regulatory environment and a tendency towards inflation. It added political uncertainty in the period leading up to the national elections scheduled for 2014 was another risk.
It said the stable outlook on India’s rating was based on expectation the economy’s structural strengths — a high household savings rate and a relatively competitive private sector —would lead to the gross domestic product (GDP) rising from about 5.4 per cent this financial year to at least six per cent in 2013-14.
Experts, however, said economic growth, investment rate and saving rate, weren’t healthy.
Moody’s estimates India’s economy to grow 5.4 per cent in the current financial year — the lowest in a decade. For the next financial year, it estimated growth of at least six per cent. In 2011-12, the economy grew 6.5 per cent, a nine-year low rate. Even in the crisis period of 2008-09, the economy grew 6.7 per cent.
The investment and saving rates are also below the pre-crisis period. The Prime Minister’s Economic Advisory Council (PMEAC) estimates the investment rate this financial year at 35.3 per cent of GDP. Though this would be higher than 34.7 per cent last financial year, it would, nonetheless, be much lower than 38.1 per cent in the in pre-crisis period of 2007-08. In the first quarter of the current financial year, gross fixed capital formation (the proxy for investment rate) grew just 0.65 per cent, compared with 14.65 per cent in the year-ago period.
PMEAC has projected the savings rate this financial year at 31.7 per cent of GDP, up from 30.4 per cent in 2011-12, but lower than 36.8 per cent in 2007-08.
Moody’s said a reversal in the central bank’s monetary policy stance would revive investor sentiment. The Reserve Bank of India has hinted it might cut rates from January. In its last policy review meeting, the central bank had kept the repo rate unchanged at eight per cent, but cut the cash reserve ratio by 25 basis points to 4.5 per cent.
Moody’s cautioned unanticipated domestic political turmoil, worsening global growth and financial conditions or a surge in food and other commodity prices could hit the pace and timing of an economic recovery. It also pointed to flaws in the social and physical infrastructure, which lowered competitiveness, fuelled inflationary pressures and distorted the macroeconomic balance.
Allowing up to 51 per cent foreign direct investment in the multi-brand retail sector would help ease supply side constraints, it said. However, it cautioned while some measures announced in September didn’t need parliamentary approval, there was no guarantee the United Progressive Alliance government would be able to implement the structural reforms that needed Parliament’s consent.
Among ‘Baa’ countries, India’s annual deficits tend to be among the highest. These have also proven more vulnerable to growth downturns, owing to elastic revenues and rigid expenditures, Moody’s said.
Though absolute debt levels had risen steadily, the government’s debt-to-GDP ratio had been declining through the last few years, partly due to high inflation, the report said.