Moody’s Investors Service (Moody’s) on Friday affirmed a ‘Baa3’ rating on India’s long-term local and foreign-currency sovereign ratings and retained the outlook at ‘stable’. The short-term local currency rating stands at P-3.

The affirmation and stable outlook are driven by Moody’s view that 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, the international rating agency said in a statement.

It also flagged that India continues to be weighed down by a high debt burden and weak debt affordability, long-standing features of India’s sovereign rating that Moody’s expects to remain.

India’s fiscal strength remains a key weakness in the sovereign credit profile, balancing high economic strength, it noted. Even as the narrowing fiscal deficit demonstrates the ongoing government’s commitment to longer-term fiscal sustainability, it remains wider than its Baa-rated peers, it added.

Moody’s latest rating action on India came after a meeting that its rating committee had with the Finance Ministry on August 15.

HIGH DEBT BURDEN

Moody’s noted that a lasting upward shift in global and domestic interest rates highlights the risks stemming from a high debt burden and weak debt affordability.

Moody’s expects global and domestic interest rates to remain at their current high levels for the foreseeable future, which precludes a greater improvement in debt affordability despite some indications of greater revenue buoyancy than in the past.

Moody’s said 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 expects India’s economic growth to outpace all other G20 economies through at least the next two years, driven by domestic demand.

MANUFACTURING SECTOR

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, according to Moody’s.

Despite some progress in developing the manufacturing sector in recent years, structural weaknesses include trade barriers, protectionist measures, and low education and skill levels for a large part of the population.

POLITICAL TENSION

The curtailment of civil society and political dissent, compounded by rising sectarian tensions, supports a weaker assessment of political risk and the quality of institutions, it said.

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