The logo of global rating agency Moody's.
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Ratings agency Moody’s, on Friday, affirmed its long-term sovereign rating on India at Baa3, and also maintained the country’s ‘stable’ outlook, reasoning that India's economic growth will outpace all other G-20 economies through at least the next two years, driven by domestic demand.
This comes just two months after Union Finance Ministry officials had made a strong pitch to Moody’s for a sovereign ratings upgrade.
“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 will contribute to gradually rising income levels and overall economic resilience,” Moody’s said in a note.
The note stated that India’s financial sector continues to strengthen, alleviating much of the economic and contingent liability risks that had previously driven ratings downward.
It said that the central government's ongoing emphasis on infrastructure development, visible through the substantial increase in capital spending outlay in the last budget, has led to tangible improvements in logistics performance and the quality of trade and transport-related infrastructure.
“This has complemented the government's implementation of its digital public infrastructure—which has entailed the widespread adoption of digital payments and data exchange—in enhancing the efficiency of public service delivery, while also boosting the formalisation of the economy and broadening the tax base,” it said, adding that that the economic benefits of the DPI will materialise overtime and support India's growth potential.
Moody’s, however, warned that, over the longer term, constraints on the economy's ability to deliver a significant increase in manufacturing and improvements in job creation will limit potential growth.
Despite some progress in developing the manufacturing sector in recent years, structural weaknesses remain, including trade barriers, protectionist measures, low education and skills levels for a large part of the population, it said.
It also pointed out that 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.
“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 Modi in August,” Moody’s said.
In mid-June, senior Finance Ministry officials had pitched the ratings agency for an upgrade, saying that as per all high-frequency indicators, the rural and urban economies were both recovering strongly.
Moody's 'Baa3' rating on India is the lowest investment grade rating. A higher rating would mean the nation is less riskier for investors and will translate into lower interest rates on borrowings for foreign money.
In May, two other global rating agencies - S&P and Fitch - had kept India's rating unchanged at 'BBB-', with a stable outlook. All three global rating agencies — Fitch, S&P and Moody's — have the lowest investment grade rating on India, with a stable outlook. The ratings are looked at by investors as a barometer of the country's creditworthiness and impact borrowing cost.