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Rating Action:

Moody's changes India's rating outlook to stable from negative; affirms Baa3 rating

05 Oct 2021

New York, October 05, 2021 -- Moody's Investors Service ("Moody's") has today changed the outlook on the Government of India's ratings to stable from negative and affirmed the country's foreign-currency and local-currency long-term issuer ratings and the local-currency senior unsecured rating at Baa3. Moody's has also affirmed India's other short-term local currency rating at P-3.

The decision to change the outlook to stable reflects Moody's view that the downside risks from negative feedback between the real economy and financial system are receding. With higher capital cushions and greater liquidity, banks and non-bank financial institutions pose much lesser risk to the sovereign than Moody's previously anticipated. And while risks stemming from a high debt burden and weak debt affordability remain, Moody's expects that the economic environment will allow for a gradual reduction of the general government fiscal deficit over the next few years, preventing further deterioration of the sovereign credit profile.

The affirmation of the Baa3 ratings balances India's key credit strengths, which include a large and diversified economy with high growth potential, a relatively strong external position, and a stable domestic financing base for government debt, against its principal credit challenges, including low per capita incomes, high general government debt, low debt affordability and more limited government effectiveness.

India's long-term local-currency (LC) bond ceiling remains unchanged at A2 and its long-term foreign-currency (FC) bond ceiling remains unchanged at A3. The four-notch gap between the LC ceiling and issuer rating reflects limited political event risk that would significantly disrupt the economy and modest external imbalances, balanced by a large government footprint in the economy and limited predictability and reliability of government policies. The one-notch gap between the LC and FC ceiling reflects limited external indebtedness and that, despite a history of several forms of capital controls, a debt moratorium remains unlikely.

RATINGS RATIONALE

RATIONALE FOR CHANGING THE OUTLOOK TO STABLE FROM NEGATIVE

RECEDING FINANCIAL SECTOR RISKS WILL ALLOW GROWTH TO SUPPORT DEBT STABILIZATION

Risks that a negative feedback loop between the financial sector and real economy set in have receded, resulting in lower susceptibility to event risk. Solvency in the financial system has strengthened, improving credit conditions which Moody's expects to be sustained as policy settings normalize. Bank provisioning has allowed for the gradual write-off of legacy problem assets over the past few years. In addition, banks have strengthened their capital positions, pointing to a stronger outlook for credit growth to support the economy.

An economic recovery is underway with activity picking up and broadening across sectors. Following a deep contraction of 7.3% in fiscal 2020 (ending March 2021), Moody's expects India's real GDP to surpass 2019 levels this fiscal year, rebounding to a growth rate of 9.3%, followed by 7.9% in fiscal 2022. Downside risks to growth from subsequent coronavirus infection waves are mitigated by rising vaccination rates and more selective use of restrictions on economic activity, as seen during the second wave.

Looking ahead, Moody's expects real GDP growth to average around 6% over the medium term, reflecting a rebound in activity to levels at potential as conditions normalize. The growth projections take into account structural challenges, including weak infrastructure, rigidities in labor, land and product markets that continue to constrain private investment and contribute to post-pandemic economic scarring. The government announced reforms throughout the pandemic that include measures aimed at increasing the flexibility of labor laws, raising agricultural sector efficiency, expanding investment in infrastructure, incentivizing manufacturing sector investment and strengthening the financial sector. If implemented effectively, these policy actions would be credit positive and could lead to higher potential growth than expected.

In turn, a return to trend nominal GDP growth of around 10-11% over the next few years will allow for a gradual fiscal consolidation and stabilization of the government's debt burden, albeit at high and above pre-pandemic levels.

RATIONALE FOR RATING AFFIRMATION AT Baa3

India's economic strength provides key support to its sovereign credit profile. The country's large and diverse economy, growing working-age population and opportunities for productivity catch-up to boost growth potential over the long term all support economic strength. Meanwhile, significantly narrower current account deficits than in the first half of the last decade and foreign exchange reserves at historically high levels, have strengthened India's external position and reduced its vulnerabilities to external shocks.

These strengths are balanced by India's main credit challenges, its low per capita income and its weak fiscal position, which has been exacerbated by the coronavirus shock. India's general government debt burden increased sharply from 74% of GDP in 2019 to an estimated 89% of 2020 GDP, significantly higher than the Baa median of around 48%. Meanwhile, interest payments are about 26% of general government revenue, the highest among Baa-rated peers and more than three times the Baa median of 8%. Looking ahead, Moody's expects the debt burden to stabilize at around 91% over the medium term, as strong nominal GDP growth is balanced by a gradually shrinking, but still sizeable, primary deficit. Combined, a higher debt burden and weaker debt affordability than before the pandemic, which Moody's expects to persist, contribute to lower fiscal strength.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS

India's ESG Credit Impact Score is Highly Negative (CIS-4), reflecting its Highly Negative environmental and social risks, along with Moderately Negative governance. Set against this risk exposure, overall resilience is low, as a weak government balance sheet and relatively low income levels exacerbate institutional constraints in the sovereign's capacity to mitigate ESG risks.

India's Highly Negative exposure to environmental risks (E-4 issuer profile score), relates to very high exposure to physical climate, water and pollution risks. The country is exposed to heat and water stress, along with flooding and rising sea levels. India drains a significant proportion of its scarce fresh water resources every year, leaving the population and economy reliant on monsoons that climate change is likely to make more irregular. As a result, severe droughts regularly cause significant social and economic distress. Intensifying air pollution and solid waste management present additional material risks.

Exposure to social risk is Highly Negative (S-4 issuer profile score), driven by risks related to low and unevenly distributed incomes, unequal access to high-quality education, strains on housing, healthcare and basic services provision. While the government has invested in improving access to basic services, with demonstrated progress in sanitation and running water, around 15% of the population is undernourished and early-age mortality remains relatively high.

Governance is Moderately Negative (G-3 issuer profile score), denoting particular weakness in policy effectiveness which hampers the sovereign's capacity to respond to negative environmental and social shocks and trends.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Moody's could upgrade the ratings if India's economic growth potential increased materially beyond its expectations, supported by effective implementation of government economic and financial sector reforms that resulted in a significant and sustained pickup in private sector investment. Effective implementation of fiscal policy measures that resulted in a sustained decline in the government's debt burden and improvements in debt affordability would also provide support to the credit profile.

Weaker economic conditions than currently expected that pointed to lower growth over the medium term and/or a resurgence of financial sector risks would put downward pressure on the rating. Weaker growth than projected would in turn contribute to an ongoing rise in the debt burden, which could weaken the sovereign's fiscal strength further and lead to a negative rating action.

GDP per capita (PPP basis, US$): 6,461 (FY2020 Actual) (also known as Per Capita Income)

Real GDP growth (% change): -7.3% (FY2020 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Mar/Mar): 5.5% (FY2020 Actual)

Gen. Gov. Financial Balance/GDP: -13.8% (FY2020 Estimate) (also known as Fiscal Balance)

Current Account Balance/GDP: 0.9% (FY2020 Actual) (also known as External Balance)

External debt/GDP: 20% (FY2020 Estimate)

Economic resiliency: baa1

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 30 September 2021, a rating committee was called to discuss the rating of the India, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's institutions and governance strength, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has materially decreased. The issuer has become less susceptible to event risks.

The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288435.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

William Foster
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Marie Diron
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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