Moody's Investors Service expects India's economic growth to outpace all other G20 economies through at least the next two years, driven by domestic demand.
While this also reflects an improved assessment of India's potential growth to around 6.0% to 6.5% from less than 6% during much of the pandemic, it remains lower than estimates in excess of 7% in the middle of the last decade, the credit rating agency says.
On Friday, Moody's affirmed the Government of India's rating at 'Baa3' while maintaining a stable outlook.
"The affirmation and stable outlook are driven by Moody's view that India's economy is likely to continue to grow rapidly by international standards, although potential growth has come down in the past 7-10 years," says Moody's.
It, however, cautions that India's fiscal strength remains a key weakness in the sovereign credit profile, balancing high economic strength. Moody's expects high nominal GDP growth and ongoing fiscal consolidation to stabilise the government debt burden at high levels.
Despite some upside pressures on spending to help the economy cope with higher inflation, the government has been able to meet its fiscal deficit targets at the central government level over the past two years, aided by buoyant tax revenue, the rating agency says.
"Even as the narrowing fiscal deficit demonstrates ongoing government's commitment to longer-term fiscal sustainability, it remains wider than Baa-rated peers," it says.
In the absence of more material gains in revenue, the central government will be challenged to achieve its fiscal deficit target of 4.5% of GDP for the fiscal year beginning April 2025 from 6.4% in fiscal 2022, estimates Moody's.
Upside risks to inflation and correspondingly higher interest rates could challenge efforts to rein in spending and exacerbate already weak debt affordability, cautions the credit rating firm.
Moody's projects general government debt to stabilise at around 80% of GDP over the next two to three years, lower than the peak of almost 90% reached in fiscal 2020 but higher than many similarly-rated sovereigns.
Moody's says its rating action takes into account a "curtailment of civil society and political dissent, compounded by rising domestic political risk." This, compounded by rising sectarian tensions, support a weaker assessment of political risk and the quality of institutions, it says.
"One recent event illustrative of these trends is the eruption of unrest in the north-eastern state of Manipur—one of the most impoverished states in India—that has led to at least 150 deaths since May 2023, and underpinned a no-confidence vote on Prime Minister Narendra Modi in August, although this was ultimately unsuccessful," says Moody's.
"Although elevated political polarisation is unlikely to lead to a material destabilisation of government, rising domestic political tensions suggest an ongoing risk of populist policies—including at the regional and local government levels—amid the prevalence of social risks such as poverty and income inequality, as well as inequitable access to education and basic services," the rating agency says.
