Global credit rating agency Moody’s Investors Service on Monday said that risks confronting the Indian economy have grown amidst political uncertainties, higher government borrowing and rising prices.
“Higher oil prices and the lack of adequate fiscal policy reactions amidst high pent-up price pressures are putting the burden on macro-economic adjustment on the monetary authorities,” said Aninda Mitra, a senior analyst with Moody’s.
Risks confronting the economy have grown, but not yet to the extent that the government’s Baa3 (investment grade) foreign currency and Ba2 (non-investment grade) local currency ratings are threatened, it said.
“Policy as well as market interest rates could rise and a sharp deceleration in growth may follow,” Mitra said. Concurrently, “greater government borrowing needs, while not leading to a material deterioration of its key credit metrics, would likely prevent an improvement in the remainder of FY08-09, contrary to our earlier expectation,” he said.
Mitra made his remarks in conjunction with the release of a new Moody’s report — India’s Stable Ratings Outlook Incorporates Economic Turbulence, but Risks Lie over the Horizon.
The report analyses various scenarios, built around certain oil price assumptions, which could stress India's credit metrics. The report, which was authored by Mitra on the outlook for India’s sovereign ratings, said political issues play a role in India's fiscal problems.
The outlook for reform remains uncertain. The report said: “elections are due in less than a year’s time, and it is not clear whether the new coalition partners would support further reforms that could alleviate the economic stresses.”
Other analysts also felt the Indian economy would slowdown in the current financial year. “We expect GDP growth to moderate to 7.5 per cent in 2008 and to 8.1 per cent in 2009 from 9.3 per cent in 2007, with downside risks to this forecast,” said Rob Subbaraman, a Singapore-based economist with Lehman Brothers. “While the slowdown has so far been confined to the industrial sector, we expect this to spread to the services sector because of the financial market turbulence.”