Government Finance Dragging Down India’s Credit Profile: Moody's

Published: 12th March 2015 06:00 AM  |   Last Updated: 12th March 2015 05:03 AM   |  A+A-

MUMBAI:Assessing government financial strength as ‘low’, Moody’s Investors Service said that the government’s finances are the weakest aspect of India’s credit profile.

Low incomes are a major handicap as it not only limits the government’s capacity to enlarge the tax base but also necessitates greater social spending requirement.

The country also faces challenges such as weak government finances, susceptibility to inflationary pressures as well as regulatory and infrastructure constraints on growth. The weakness of India’s banking sector is another key source of India’ susceptibility to any event risk, it said.

Among the credit challenges for the country’s sovereign rating include high government debt and deficit; weak physical and social infrastructure; recurrent inflation and regulatory uncertainty and complexity. Yet, Moody’s retains India’s rating at Baa3 because of some of the positives such as strong foreign exchange reserves, high domestic savings, robust growth prospects and a diversified economy.

The government is able to finance its large borrowing program at favourable rates and long maturity because of reasonably higher level of domestic savings and courtesy a banking system that is mandated to hold a certain proportion of government securities.

In another assessment on India, International Monetary Fund cautioned that India’s high inflation expectations and, wide fiscal deficits remain key macroeconomic challenges and reduces its policy space to adopt counter-cyclical policies.

“Supply-side bottlenecks and structural challenges — particularly in the agriculture, mining and power sectors — constrain medium-term growth and hinder job creation,’’ the IMF said in a note on Wednesday. “Risks are still tilted to the downside, with the main external risk stemming from surges in global financial market volatility”. It also cited weakening of bank and corporate balance sheets posing risks to economic recovery and weighing on financial soundness. Despite recent moderation in headline inflation, underlying inflationary pressures and upside risks remain, the IMF said.

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