Although India is likely to avoid a drought this year, its economy remains vulnerable to fluctuations in rainfall, which may affect its future sovereign rating profile, global credit rating agency Moody’s said in its latest report.
Moody’s, however, said that if the government’s efforts to improve rural infrastructure, food distribution and non-agricultural employment opportunities are sustained and successful over the next two to three years, these could lower India’s vulnerability to drought.
It would also benefit India’s overall sovereign credit profile, because they would lead to higher incomes, stable and lower inflation and lesser fiscal burden related to food subsidies, it said in the report titled India, Government of: Vulnerability to Drought Poses Credit Challenges.
The report compared India to several other countries in which agriculture has a material share of gross domestic product and concluded that the Indian economy’s vulnerability to drought stems from the combination of five factors. These include relatively high share of agriculture in overall employment, weak rural infrastructure and irrigation, inefficient food distribution, large proportion of Indian household spending on food, and the share of food subsidy costs in the Centre’s fiscal deficit.
According to Moody’s, because of the above factors, drought can simultaneously lower GDP growth, raise inflation and add to fiscal pressures, leaving India’s sovereign credit profile more susceptible to the effect of drought compared to those of other Baa-rated sovereigns.
“India’s economic exposure to annual fluctuations in rainfall constrains the ability of monetary policy to respond to the ongoing macro-economic developments. This is particularly so in years such as the current one when a weak monsoon forecast coincides with an uncertain cyclical recovery,” it said.