Moody's Investors Service has affirmed a ‘BAA3’ rating on India and retained the outlook at stable on the back of its long-term local and foreign-currency sovereign ratings, the ratings agency said in a statement on Friday.
Moody’s said other short-term local-currency rating stands at P-3.
It added that India continues to suffer from a high debt burden and weak debt affordability.
Besides, the Baa3 rating and stable outlook also take into account a curtailment of civil society and political dissent, compounded by rising domestic political risk.
“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,” it said.
“High GDP growth will contribute to gradually rising income levels and overall economic resilience. In turn, this will support gradual fiscal consolidation and government debt stabilisation, albeit at high levels,” the report said.
In June this year, India questioned the rating parameters of Moody’s Investors Service and sought an upgrade from the global ratings agency.
Moody's rated India at the lowest investment grade of "Baa3" with a "stable" outlook. Global ratings agencies, like Moody's, take into account parameters such as the economic growth rate, inflation, general government debt and short-term external debt as a percentage of GDP, and political stability as some of the key considerations.
In August's report, Moody's added the financial sector continues to strengthen, alleviating much of the economic and contingent liability risks that had previously driven downward rating pressure.
Mentioning the Manipur crisis in its report, Moody’s said there was curtailment of civil society.
“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,” it said.
Moody’s also flagged the risk of populist policies. “Although elevated political polarization is unlikely to lead to a material destabilsation of government, rising domestic political tensions suggest an ongoing risk of populist policies— including at the regional and local government levels,” it said.
Explaining further, Moody’s said that domestic demand will spur India’s economic growth in the next two years. High growth by international standards may support a gradual increase in income levels which are currently low.
According to the ratings agency, India's potential growth has improved to 6-6.5 percent from sub-6 percent levels during the coronavirus pandemic. However, India's potential growth rate "remains lower than estimates in excess of 7 percent in the middle of the last decade", Moody's said.
It added that the government's focus on capital expenditure has resulted in "tangible improvements" in logistics performance and the quality of trade and transport-related infrastructure.
Other positives include the digital public infrastructure, formalisation of the economy, broadening of the tax base, and "fundamental improvement" in the banking system over the last three years.
The report added that the economy's limited ability to significantly increase manufacturing output and improve job creation is limiting its potential growth.
"Despite some progress in developing the manufacturing sector in recent years, structural weaknesses including trade barriers and protectionist measures and low education and skills levels for a large part of the population," Moody's report said.
Also read: Rising food prices: Govt mulls measures to stem price rise
Also read: Disinvestment revenue to see shortfall this year
Also read: India may well be on track to becoming world's third largest economy