New Delhi: Credit ratings agency Moody’s Investors Service Friday raised concerns over the “curtailment of civil society” in India and also the violence in Manipur, while retaining its sovereign rating for the Indian government’s debt. The ratings agency has also retained its outlook for India at ‘stable’, citing India’s strong economic growth.
In its note, Moody’s said that it has retained India’s rating at Baa3, which is just one level above ‘non-investment grade’ debt, colloquially known as ‘junk debt’ — so named to reflect the risky nature of investing in it. A rating one level above junk means that the agency considers Indian government debt to be quite risky.
A bond credit rating business of Moody’s Corporation, Moody’s Investors Service, often referred to simply as Moody’s, is a firm that provides international financial research on bonds issued by commercial and government entities. Moody’s, along with Standard & Poor’s and Fitch Group, is considered one of the ‘Big Three’ credit rating agencies.
Moody’s ratings range from AAA, the highest level, followed by AA, A, Baa, Ba, B, Caa, Ca, and C, the lowest rating. The Baa rating is further divided into three categories, 1, 2, and 3, Baa3 being the lowest.
According to Moody’s classification system, debt that is in the Baa category is “subject to moderate risk” and is considered “medium grade”.
While the ratings agency enumerated a number of strengths of the Indian economy, stronger banking sector, central government push for infrastructure creation, and provision of digital public infrastructure, it also highlighted several weaknesses such as high interest rates, relatively high fiscal deficit and government debt, and elevated interest payments.
The note also cites the unrest in Manipur as an example of “curtailment of civil society and political dissent” in the country.
Ethnic clashes between Manipur’s tribal Kuki and non-tribal Meitei communities erupted on 3 May, following a ‘Tribal Solidarity March’ taken out to oppose the demand for inclusion of Meiteis in the Scheduled Tribe (ST) category and for what was described as an effort to secure the rights and constitutional safeguards of the ethnic Kuki and their sub-tribes.
Violence has been reported in the state ever since, claiming over 150 lives and displacing over 50,000 people, according to police data.
Indian economy has several strengths
The ratings agency said that while India’s strong growth fundamentals were behind it retaining its ratings and outlook, a high interest rate environment globally and in India could pose risks to Indian government debt.
“Moody’s expects India’s economic growth to outpace [that of] all other G20 economies through at least the next two years, driven by domestic demand,” Moody’s said in its note. “In turn, high growth by international standards will support a gradual increase in currently low-income levels, which will contribute to economic strength.
However, the ratings agency also noted that, while India’s growth outlook of 6-6.5 percent was better than the growth in the pandemic-affected period, “it remains lower than estimates in excess of 7 percent in the middle of the last decade”.
The note highlighted the government’s ongoing infrastructure push, which has led to improvements in logistics performance and the quality of trade and transport infrastructure. This, it added, has been complemented by the central government’s other major push— digital public infrastructure (DPI).
DPI refers to building of digital platforms such as digital identification, payment infrastructure and data exchange. According to the United Nations Development programme, it is a critical enabler of digital transformation and helps improve public service delivery at scale.
“Moody’s expects that the economic benefits of the DPI will materialise over time and support India’s growth potential,” the note said.
It also said that the improvement in the banking sector has allowed the private sector to avail of bank credit to fund capital formation.
…but the weaknesses remain
According to the ratings agency, despite these positives in the Indian economy, constraints on the economy’s ability to deliver a significant increase in manufacturing and improvements in job creation in the long term “will limit potential growth”.
“Despite some progress in developing the manufacturing sector in recent years, structural weaknesses including trade barriers and protectionist measures and low education and skills levels for a large part of the population,” the agency said.
On the fiscal deficit front, the ratings agency said that while it was narrowing, it was still wider than other Baa-rated countries. Without a significant increase in revenue, the central government would find it challenging to achieve its fiscal deficit target of 4.5 per cent of GDP by 2025-26, down from the 6.4 per cent it registered in 2022-23, the agency said.
Consequently, Moody’s projects general government debt to stabilise at around 80 percent of GDP over the next two to three years — “lower than the peak of almost 90 percent reached in fiscal 2020 but higher than many similarly-rated sovereigns”, the note said.
It added that the government’s interest payments on its debt burden “will remain the highest relative to revenue among similarly rated peers”.
Manipur violence & civil society action a concern
The Moody’s note had strong words about the crisis and ongoing violence in Manipur, and also about the repression of detractors of the government.
“The curtailment of civil society and political dissent, compounded by rising sectarian tensions, support a weaker assessment of political risk and the quality of institutions,” the note said.
It said one event that illustrates these trends is the unrest in Manipur — “one of the most impoverished states in India — that has led to at least 150 deaths since May 2023, and underpinned a no-confidence vote on Prime Minister Narendra Modi in August, although this was ultimately unsuccessful”.
It added that although “elevated political polarisation is unlikely to lead to a material destabilisation of government”, the rising domestic political tensions suggest a risk that governments — including at the state and local levels — will increasingly turn to populist policies.
(Edited by Uttara Ramaswamy)
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