The Indian government’s poor financial condition is the weakest aspect of India’s credit profile, international ratings agency Moody’s has said, adding that state-owned banks’ poor assets are another area of concern.
On the other hand, strong private savings and growth are positive aspects to the Indian economy, Moody’s added.
“Government finances are the weakest aspect of India’s credit profile. We assess its government financial strength as ‘Low’. India’s government debt ratios and fiscal deficits are higher than those of similarly rated peers and are expected to remain so over the rating horizon. Low incomes limit the government’s tax base, while at the same time increasing social spending pressures,” it said today.
The second negative factor — poor quality bank loans, Moody’s said, has increased India’s ‘event risk’ – or the chance that India would be drastically impacted unexpected negative events.
“At this time, banking sector weakness is a key source of India’s susceptibility to event risk. Slower growth coupled with high inflation and interest rates in the last two years have eroded banking sector asset quality and profitability, particularly among state-owned banks. This has increased the fiscal costs of banking sector support, raised domestic financial risks and will limit the support provided by credit growth during the early stages of the current economic recovery.”
Moody’s also seemed to give its approval to the new GDP number series, which have shown that the economy has been growing faster than previously estimated.
“Recent methodology and base year updates to GDP compilation resulted in higher growth between 2012 and 2014 than official figures had previously indicated. The new compilation method brings it on par with international standards of GDP estimations. Revisions resulted in 6.9% real GDP growth in 2013-14, from a previously estimated 5.0%. Annual growth in real GDP increased from 6.5% in the June quarter of 2014 to 8.2% in the September quarter, and was 7.5% in the December quarter,” it added.
Moody’s also expects India’s current account deficit to remain under control, despite slightly more relaxed norms as far as gold imports are concerned.
“The current account deficit ended FY 2013/14 at 1.7% GDP, declining from 4.8% GDP in FY 2012/13 due to a combination of administrative controls on gold imports, rupee depreciation, and slack domestic demand. The deficit had declined sharply to 0.2% of GDP in the quarter ended March 2014, but widened to 2.0% of GDP in the September quarter. While a recovery in growth and the recent liberalization of gold imports could lead to a further rise in imports over coming quarters, subdued commodity prices will likely keep the deficit from widening sharply. Moreover, we expect the current account to be amply funded by foreign capital inflows leading to a balance of payments surplus and build-up in reserves over the year.”
