Moody's: India's fiscal and structural reform policies, not GDP revisions, to determine sovereign credit profile

Moody's Investors Service says that upward revisions of India's GDP growth -- based on methodological and base year updates -- highlight the strength of the economy, but do not impact Moody's overall assessment of the sovereign's credit profile. Rather, fiscal and structural reform policies will determine the extent to which accelerating growth will buttress the sovereign credit profile.

Moody's conclusions are contained in its report on the Indian government, "GDP Revisions Underscore Economic Strength, But Are Credit Neutral."

India's GDP growth in the fiscal year ended March 2014 is estimated at 6.9% under the new methodology, from 5% according to the previous methodology. Growth estimates for the prior and the current year were also revised higher.

Moody's report notes that similar methodological updates have led to upward revisions in other economies as well, although the magnitude of the upward revision in India was relatively high, given the growth rate implied by other economic indicators. Nonetheless, even before the GDP revisions, India's average growth rate was higher than many similarly rated peers.

While the newly released data underscore that India's high economic growth supports its sovereign credit rating of Baa3 with a stable outlook, they did not change ratios for government finances, private external leverage and bank asset quality, all of which continue to pose sovereign credit risks, according to Moody's.

In times of both accelerating and decelerating growth, India's wide fiscal deficits, poor infrastructure and regulatory complexity have combined to create a mismatch between domestic demand and supply, contributing to inflation and current-account pressures.
In 2015, benign global oil prices are likely to keep India's inflation and current-account pressures in check, the report says. This could allow for more accommodative monetary policy which, in turn, would revive investment growth.

However, in the absence of government action to reduce fiscal deficits and structural supply constraints, a pick up in domestic demand or rebound in global commodity prices could lead to renewed inflation and current-account pressures over a three- to five- year horizon. Such a rise in macro-economic imbalances could trigger balance of payment pressures, particularly if international liquidity conditions were to tighten from current levels.

Therefore, says the report, policies to address India's fiscal and supply side constraints will determine whether India's current growth momentum and macro-economic balance can be maintained over the coming years.