Moody's Affirms India's Baa3 Rating, 'Stable' Outlook; Warns About Rising Political Risk

Moody's Investors Service noted that despite rapid development, India's prospective growth has slowed in the last 7-10 years

Moody's 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." 

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Moody's Investors Service affirmed India's Baa3 rating and maintained its stable outlook on Friday, while also warning of political issue, citing the ongoing unrest in Manipur as an example. While maintaining India's Investment-grade rating, Moody's said that, despite rapid development, India's prospective growth has slowed in the last 7-10 years. It also noted the country's continuing high debt load and low debt affordability.

“The Baa3 rating and stable outlook also take into account a curtailment of civil society and political dissent, compounded by rising domestic political risk,” Moody’s said in a statement on August 15. Adding that India's "high GDP growth will contribute to gradually rising income levels and overall economic resilience. In turn, this will support gradual fiscal consolidation and government debt stabilization, albeit at high levels."

It further said that the financial sector continues to strengthen, alleviating much of the economic and contingent liability risks that had previously driven downward rating pressure. The government's focus on infrastructure development and increased capex has led to tangible improvements in logistics performance and the quality of trade and transport-related infrastructure, the rating firm noted. 

However, it further said 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 Narendra Modi in August, although this was ultimately unsuccessful,” Moody's said. 

"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. Moreover, the periodic flaring of border tensions with neighbouring countries was an outlier among sovereigns assessed as having a lower overall susceptibility to political risk," it added.

Manipur has been facing prolonged ethnic violence with 3 reported killed on August 18. The opposition has raised the issue in Parliament's Monsoon Session, leading to a no-confidence motion against the government, which was defeated.

Moody's also indicated that while India's domestic rates have risen, persistent concerns related to high debt and weak debt affordability, which have long characterised India's sovereign rating, are likely to persist. Moody's rationalised its rating perspective by noting that the country's economic growth will be driven by domestic demand over the next two years. This growth, though substantial internationally, is expected to lead to a gradual rise in income levels that are currently relatively low.

“While this also reflects an improved assessment of India's potential growth to around 6.0 per cent to 6.5 per cent, from less than 6 per cent during much of the pandemic, it remains lower than estimates in excess of 7 per cent in the middle of the last decade,” the statement said. Adding that “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 believes that India's 'stable' outlook reflects expectations of improving fiscal metrics and robust growth prospects compared to peers.

“The outlook also reflects Moody's expectations of broad financial and external stability as represented by resilient credit growth, ample domestic liquidity to meet the funding requirements of the public and private sector, manageable current account deficits and sufficiently large," the rating agency said.