Moody’s Forecasts India to Outshine All G20 Economies in Growth for the Next 2 Years
Written by Sanjay Kumar
Moody’s Investors Service upheld India’s credit rating at the lowest investment grade of ‘Baa3’ on Friday (August 18). The agency maintained a stable outlook, projecting that the nation’s robust growth would contribute to gradual income level increases. Nonetheless, Moody’s raised concerns about potential populist policies due to escalating political tensions.
Despite a decline in India’s potential growth over the past 7-10 years, Moody’s anticipated that its growth would surpass all other G20 economies in the next two years. This growth would be driven by domestic demand, as per Moody’s assessment.
The post-pandemic recovery of India’s strong growth prospects, along with a firm commitment to inflation targeting and financial system reforms, led Moody’s to support the strengthening of monetary and macroeconomic policy effectiveness.
However, Moody’s noted that curtailed civil society, limited political dissent, and growing sectarian tensions contributed to a less favorable evaluation of political risk and institutional quality. While affirming the government’s long-term local and foreign-currency issuer ratings, as well as the local-currency senior unsecured rating at Baa3, the agency expressed concerns about these factors.
In specific reference to Manipur, Moody’s highlighted that violence since May 2023 has resulted in around 150 deaths, indicating increased regional instability.
Moody’s observed that while severe political polarization might not directly destabilize the government, rising domestic political tensions increased the risk of populist policies. This was especially noteworthy at regional and local government levels, given the backdrop of social challenges such as poverty, income inequality, and limited access to essential services like education.
Furthermore, Moody’s identified sporadic border tensions with neighboring countries as a unique concern in comparison to other countries evaluated as having a lower susceptibility to political risks.
It’s important to note that Baa3 represents the lowest investment grade rating.
All three prominent global rating agencies – Fitch, S&P, and Moody’s – have assigned India the lowest investment grade rating with a stable outlook. Investors consider these ratings as indicators of a country’s creditworthiness, impacting its borrowing costs.
Moody’s predicted that without significant revenue gains, the central government might face difficulty in achieving its fiscal deficit target of 4.5% of GDP for the fiscal year starting April 2025. This projection follows a fiscal deficit of 6.4% in fiscal 2022.
As a result of these fiscal dynamics, Moody’s anticipated that the general government debt would stabilize around 80% of GDP over the next 2-3 years. This would be lower than the peak of nearly 90% recorded in fiscal 2020 but higher than many sovereigns with similar ratings.
The agency’s stable outlook reflected expectations of financial and external stability. This would manifest through resilient credit growth, ample domestic liquidity to meet public and private sector funding needs, manageable current account deficits, and substantial foreign-currency reserves to cover external payment obligations and imports.
