Moody’s Affirms India’s Baa3 Rating Stable Outlook But Warns Of Political Issues

Moody’s Investors service on August 18, affirmed its Baa3 rating ‘Stable Outlook’ on India but warned of political issues. It further cited the example of the ongoing violence in the north-eastern state of Manipur.

“The curtailment of civil society and political dissent, compounded by rising sectarian tensions, support a weaker assessment of political risk and the quality of institutions," Moody's said in a statement.

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It further added, “Although elevated political polarisation is unlikely to lead to a material destabilisation of government, rising domestic political tensions suggest an ongoing risk of populist policies—including at the regional and local government levels—amid the prevalence of social risks such as poverty and income inequality, as well as inequitable access to education and basic services. Moreover, the periodic flaring of border tensions with neighbouring countries was an outlier among sovereigns assessed as having a lower overall susceptibility to political risk.”

Moody’s also said that the lasting upward shift in domestic rates highlights the risks stemming from high debt burden and weak debt affordability, some long-standing features of India's sovereign rating that it expects to remain.

“Despite some progress in developing the manufacturing sector in recent years, structural weaknesses including trade barriers and protectionist measures and low education and skills levels for a large part of the population,” Moody’s said.

India’s finance ministry has set a target of bringing fiscal inflation down to 4.5% from 6.4% of GDP for financial year 2024-25. However, Moody’s believes that the Indian economy will find this task challenging.

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“Even as the narrowing fiscal deficit demonstrates the ongoing government's commitment to longer-term fiscal sustainability, it remains wider than Baa-rated peers,” it said.

Moody’s also said that interest payments on India’s large debt burden will remain the highest relative to revenue to revenue among similarly rated peers.