Global rating agency Moody’s Investors Service expects manufacturing activity to accelerate in India over the next two years, boosting the GDP recovery.
But revenue buoyancy—which is a likely outcome of the GDP growth recovery—alone would not boost the sovereign credit profile, Moody’s said in a note prepared for its clients.
A decline in the deficit based on revenue buoyancy alone would be credit neutral at best, as the fiscal position would remain vulnerable to future cyclical downturns and external shocks, the rating agency said.
Moody’s said India’s economic recovery—manifested in first quarter GDP growth of 5.7 percent announced last Friday—is in keeping with its long held view that growth deceleration to sub-5 percent levels over the last two years would reverse over time.
The global rating agency has forecast India’s fiscal, inflation and infrastructure metrics to remain weaker than the mean for similarly rated peers.
“While stronger growth in this large and diverse economy will help to counterbalance these credit challenges, they limit further upward momentum in the sovereign rating”, said the Moody’s note.
Lower agricultural output due to a weak monsoon and more modest government spending growth as authorities aim to meet budget targets will likely temper the pace of Gross Domestic Product (GDP) acceleration in the coming months.
But growth will still likely remain above 5 percent this year, and rise further in fiscal 2016, Moody’s said.
HIGHER CAPITAL FLOWS
A recovery in economic growth will have a positive effect on India’s balance of payments and foreign reserves, via renewed investor appetite and capital flows.
Rising reserves are unlikely to provide uplift to India’s credit profile, as long as capital flows are skewed towards increasing portfolio investments and higher external bond and bank borrowing.
In such a scenario, India would remain vulnerable to domestic or global shocks that could lead to a cessation or reversal of these flows.
On the other hand, achieving greater competitiveness for manufactured goods and significant rise in foreign direct investment would benefit the sovereign credit profile, Moody’s note said.
srivats.kr@thehindu.co.in