A tentative economic rebound is not enough for global credit rating agencies that often influence investment and lending into India. A lot now hinges on the political climate.
Robust farm sector growth has helped India’s GDP growth recover slightly at 4.8% during the July-September quarter of 2013-14, triggering hopes of a broader turnaround. However, the prospect of a credit rating downgrade continues to cast a long shadow over the economy as the nation gears up for the general elections in 2014.Credit rating agency Moody’s in two separate reports on Thursday said that India’s Baa3 government bond rating — a notch above junk status — reflects the sovereign credit support derived from a large and diverse economy, high domestic savings, adequate foreign exchange reserves as well as the challenges posed by large fiscal deficits, recurrent inflation and weak infrastructure.
“The outcome of elections next year could affect growth, depending on how it impacts sentiment and policies,” Moody’s said.
In another report, the agency said that the outlook for Indian non-financial companies was “negative,” reflecting macroeconomic challenges over the next 12 months.
Moody’s expects India’s GDP growth to remain weak at 5.5% in the fiscal year ending March 2015, as elections in mid-2014 will delay reforms needed to revive the economy. “Companies will also face higher borrowing costs and tight funding conditions with monetary policy likely to remain tight,” it said.
Moody’s report comes barely a month after another US rating agency Standard & Poor’s (S&P) maintained a “negative” outlook on the Indian economy and cautioned that it could downgrade the country’s sovereign ratings if the next government does not appear capable of reversing India’s low economic growth trajectory.
In a report last month S&P maintained India’s rating at BBB-, just a notch above “junk”, which carries a higher risk of default by the government. A downgrade will erode India’s attractiveness as a global business hotspot and investment destination.
The phraseology in each of these reports is similar: stalled reforms, policy missteps, mounting deficits, galloping inflation, fractious politics and creaky infrastructure.
High inflation, a falling rupee and poor economic growth has hit the ruling UPA government at the worst possible time — key state elections have just got over, and national polls less than five months away.