Moody's sees higher economic risks for India

Moody's Investors Service said that the risks confronting India's economy have grown, but not yet to the extent that the Government's Baa3 foreign currency and Ba2 local currency ratings are threatened. "Higher oil prices and the lack of adequate fiscal policy reactions amidst high pent-up price pressures are putting the burden of macro-economic adjustment on the monetary authorities," said Aninda Mitra, a VP/Senior Analyst with Moody's Sovereign Risk Unit. As a result, policy as well as market interest rates could rise, and a sharp deceleration in growth may follow, Mitra added.

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 FY09, contrary to Moody's earlier expectation, Mitra said. Furthermore, political issues play a role in India's fiscal problems, he said in a report. The Government's fiscal difficulties relate partly to its inability to raise retail fuel prices and reduce the growing, off-budget fiscal cost of reimbursing downstream oil companies as part of its subsidies program, Mitra said.

"While Moody's overall assessment is that the current constellation of risks is captured in the prevailing stable outlook, downside pressures could emerge," Mitra said, adding that the sources would be two fold. Firstly, they could involve deteriorations in the government's general debt metrics and its access to external liquidity, given intensified commodity price shocks and an inadequate fiscal response. Secondly, such pressures could be due to the rising risk of fiscal spillovers to India's external accounts; such spillovers, if large enough, could weaken the case for the two-notch gap between its foreign currency and local currency ratings," says Mitra.

Finally, Mitra said in his report that the outlook for economic reforms remains uncertain, even though the Congress-led administration has seen off its leftist partners and re-shuffled its coalition. The author noted that, 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 country's economic stresses.