New Delhi: Moody’s Investors Service on Friday said that despite growing at a high rate, India’s potential growth has come down in the past 7-10 years and affirmed a ‘BAA3’ rating on India. Further, it flagged that India continues to suffer from high debt burden and weak debt affordability. On the economic front, the rating agency continued to view India as one of the fastest growing economies in the world, although it did note that potential growth had declined.
“The affirmation of India’s rating and stable outlook are driven by our 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. High GDP growth would contribute to gradually rising income levels and overall economic resilience as well. In turn, this will support gradual fiscal consolidation and government debt stabilisation, albeit at high levels,” Moody’s said.
In addition, it said, the financial sector continues to strengthen, alleviating much of the economic and contingent liability risks that had previously driven downward rating pressure. “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,” it said, adding that 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 rating agency further noted 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,” Moody’s said.
“However, the economy’s limited ability to significantly increase manufacturing output and improve job creation is seen as limiting 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 added.
Flagging political concerns in the country that may impact basic services, Moody’s also said the curtailment of civil society and political dissent, compounded by rising sectarian tensions, support a weaker assessment of political risk and the quality of institutions. “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,” it said.
