India's economy likely to continue to grow rapidly, although potential growth has come down: Moody's

Moody's on India: Moody's Investors Service on Friday (August 18) affirmed India's long-term local and foreign-currency issuer ratings and the local-currency senior unsecured rating at Baa3. The ratings agency has also affirmed India's other short-term local currency rating at P-3. The outlook remains stable, it said.

"The affirmation and stable outlook are driven by Moody's view that India's economy is likely to continue to grow rapidly by international standards, although potential growth has come down in the past 7–10 years. High GDP growth will contribute to gradually rising income levels and overall economic resilience. In turn, this will support gradual fiscal consolidation and government debt stabilisation, albeit at high levels. In addition, the financial sector continues to strengthen, alleviating much of the economic and contingent liability risks that had previously driven downward rating pressure," the ratings agency said in its press release.

With regards to the country's financial sector, Moody's said that the sector continues to strengthen, alleviating much of the economic and contingent liability risks that had previously driven downward rating pressure.

The fundamental improvement in the banking system's financial soundness over the last three years has also allowed the private sector to leverage upon buoyant domestic sentiment and channel funding towards capital formation beyond the immediate rebound from the pandemic, as evidenced by the robustness of credit growth. Better underwriting criteria will continue to underpin modest improvements in asset quality, while profitability and capitalisation will remain stable, helping to insulate the government from contingent risks, Moody's said. 

Moody's expects India's economic growth to outpace all other G20 economies through at least the next two years, driven by domestic demand. “The government's ongoing emphasis on infrastructure development, mirrored in the increasing share of capital expenditure in the Union budget, has led to tangible improvements in logistics performance and the quality of trade and transport-related infrastructure,” it avered.

Moody's also expects that the economic benefits of the digital public infrastructure (DPI) will materialize over time and support India's growth potential.

However, India's fiscal strength remains a key weakness in the sovereign credit profile, balancing high economic strength, the ratings agency said. Moody's expects high nominal GDP growth and ongoing fiscal consolidation to stabilise the government debt burden at high levels.