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
