Global challenges won’t affect India’s recovery: Moody’s

Rating firm lowers 2022-23 growth forecast to 7.6%, expects average inflation of 6.8%

Rating firm lowers 2022-23 growth forecast to 7.6%, expects average inflation of 6.8%

Global ratings firm Moody’s Investors Service said on Tuesday it does not expect growing challenges facing the global economy, such as the fallout from the Russian-Ukrainian military conflict, rising inflation and tighter financial conditions, derail India’s ongoing recovery from the pandemic in 2022 and 2023.

While he lowered his growth forecast for the Indian economy in 2022-2023 to 7.6%, citing higher inflation, rising interest rates, uneven distribution of the monsoon and slowing global growth as a drag on “economic momentum on a sequential basis”, Moody’s said the risks of negative feedback between the economy and the financial system are fading and reiterated its Baa3 credit rating for the Indian sovereign.

“While risks from a high debt burden and low debt affordability remain, we expect the economic environment to allow for a gradual reduction in the general government budget deficit over the next few years, avoiding a further deterioration in the sovereign credit profile,” the firm said in a credit opinion update.

The agency expects real GDP growth of 6.3% in 2023-24, while inflation is expected to average 6.8% this fiscal year and 5% next year. Moody’s also estimated that India’s current account deficit will reach 3.9% of GDP this year, up from 1.2% in 2021-22, and remain high at 3% of GDP in 2023-24.

“We expect inflationary pressures to ease in the second half of 2022 and further into 2023, while high-frequency data show strong and broad-based underlying momentum in the services and manufacturing sectors, according to solid and survey data, such as PMI, capacity utilization, mobility, tax filing and collection, business income and credit indicators.As such, we continue to consider India as the fastest growing economy among its G20 peers in 2022 and 2023,” Moody’s noted in the update.

While the agency cited India’s large, diversified economy with high growth potential, a stable domestic financing base for public debt and a relatively strong external position as its credit strengths, it identified the the country’s high public debt and the government’s limited effectiveness in alleviating major credit problems as a weak point.

Predicting that India’s “growth volatility” would “return to pre-pandemic levels”, Moody’s said the very large domestic market provided strong demand-led growth and helped “house the economy of fluctuations” in global demand. He, however, highlighted India’s high exposure to climate change risks, such as the critical dependence of the agricultural sector on monsoon rains, as half of the cultivated land was not irrigated, while the use Excessive groundwater and rising temperatures had exacerbated scarcity problems.

“The magnitude and dispersion of seasonal monsoon rains vary each year and influence the growth of the agricultural sector, food price inflation and consumption – especially as half of India’s overall consumption comes from rural sector and that many rural incomes depend on agriculture,” he noted. adding that “the country’s still low incomes limit the ability of households to absorb shocks”.

“We consider India’s legislative and executive institutions, civil society and judicial system to be relatively strong. However, in our view, policy effectiveness has been lower than suggested by some international surveys, including the World Governance Indicators. While the government’s ongoing efforts to reduce corruption, formalize economic activity, and strengthen tax collection and administration are expected to further strengthen institutions over the medium term, there are growing risks to their effectiveness,” said the company in its detailed credit considerations.

India’s political risk, or the prospect of political tensions – domestic or geopolitical – materially affecting the economy, the government’s budget or the authorities’ ability to implement policy measures, is relatively low, Moody’s said.

“However, there are certain areas of religious, ethnic or social conflict that could influence political or economic outcomes, while bilateral tensions with neighboring Pakistan and China have periodically erupted without significant escalation that disrupts economic activity. India’s income inequality and unequal access to basic services increase social risks that could impact political stability,” Moody’s noted.

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