New Delhi: The outlook for India's rating would improve if fiscal, inflation and infrastructure metrics get better, a global report said.
"India's Baa3 government bond rating balances the strong growth potential of its large and diverse economy against high fiscal deficits, recurrent inflationary pressures, as well as regulatory and infrastructure constraints on competitiveness," said Moody's Investors Service report.
The stable outlook on the rating is based on an expectation that Indian authorities will continue with policy efforts to improve the macro-economic balance and address structural constraints on growth, it said.
These conclusions are contained in the rating agency's annual credit analysis on India.
Moody's Investors Service report also India's per capita income of USD 1,509 (2013) (about Rs 92,049) ranks in the bottom decile of all rated sovereigns, limiting government's tax revenue base and increasing spending claims on its limited resources. It results in larger fiscal deficits compared to peers.
Other countries with similar scores for economic strength include Indonesia and Malaysia, which have better competitiveness, income and infrastructure metrics, but smaller economies and lower average real growth rates, it said.
The report said that "the outlook for India's rating would improve if fiscal, inflation and infrastructure metrics were to move closer to Baa median scores."
On the other hand, the outlook would weaken with a further deterioration in the fiscal position, or rising contingent liabilities from the state-owned banking sector, or a material decline in foreign exchange reserves coverage of external debt and imports.
India's sovereign credit profile is based on four main analytic factors. These factors are economic strength, institutional strength, fiscal strength and susceptibility to event risk, it said.
Moody's said India's high economic strength is a key source of sovereign credit support. India's GDP growth, savings and investment rates exceed comparable emerging-market averages.
Although growth slowed significantly between 2011 and 2014, Moody's expects it to accelerate from between 5 percent and 6 percent over the next year to above 7 percent thereafter, if global economic and financial conditions remain benign and the government effectively implements its macro-economic and structural reform agenda, it said.
Although inflation has declined in recent months, India's inflation levels are high compared to rating peers.
The report pointed to recurrent inflation, regulatory complexity and weak infrastructure as constraints on the rating that reflect institutional challenges.
Recent policy measures announced by government and the central bank to address the challenges would enhance India's operating environment and improve competitiveness, Moody's added.
India's fiscal deficits averaged 7.5 percent of GDP over the last five years, it said adding, high government deficits raise domestic borrowing costs and thus increase the private sector's reliance on external borrowing.
"Moreover, government current spending ramps up domestic demand, which fuels inflation. Annual inflation averaged 9.9 percent over the last five years.
"In 2013, India's fiscal metrics were weaker than those of any other Baa-rated country, and its inflation rate was higher than all but one Baa-rated country," the report said.
