Mumbai: Defending its decision to upgrade India’s sovereign rating amidst a broader macro-economic slowdown, Moody’s said that the recent reforms combined with India’s structural strength, offer greater confidence that the high level of public indebtedness, which is the principal credit weakness, will not rise materially even in potential downside scenarios and will eventually decline gradually.
Explaining the drivers behind its decision, the rating agency said that the number of reforms will combine to enhance India’s structural credit strengths, including its strong growth potential, improving global competitiveness and its large and stable financing base for government debt.
“It will take time for the impact of most of the measures to be seen. Some, such as the GST and demonetisation, have undermined near-term growth. However, as disruption fades, we expect to see a rebound in real and nominal GDP growth to sustained higher levels. In turn, sustained high nominal GDP growth will likely contribute to a gradual decline in the general government debt burden over the medium term,” it said.
While it has lowered its forecast for Indian GDP growth by factoring in the recent slowdown, Moody’s noted that the economy’s growth potential is strong.
“We expect the disruption of domestic supply chains to restrain growth over the next few quarters as SMEs and exporters continue to adjust to the new GST regime. However, as disruption fades, assisted by government measures to support SMEs and exporters with GST compliance, we expect to see a rebound in real GDP growth to 7.5 per cent in fiscal year 2018 ending in March 2019, with similarly robust levels of growth from fiscal 2019 onward,” Moody’s added.
On concerns regarding high oil prices hitting India’s current account deficit, the rating agency said a sharp increase in foreign direct investment would ensure that the basic balance is in surplus.
“Moreover, foreign exchange reserves have increased very significantly, to about $374 billion in October 2017. Overall, we expect India's external vulnerability to remain very low,” it said.
