Moody’s Says India Can Handle Modest Fiscal Slippage This Year

e{sn{j13onaduhttyov4ohx7_media_dl_1.png Government of India, Bloomberg

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(Bloomberg) — India can withstand a potentially wider-than-forecast fiscal deficit this year without jeopardizing its investment-grade rating, according to Moody’s Ratings, as higher energy prices are expected to pose only temporary budget pressures.

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“We don’t see India as being particularly affected because this shock is largely negative for most sovereigns,” Christian de Guzman, Singapore-based senior vice president at Moody’s Ratings, said in an interview. 

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Moody’s assigns India a Baa3 rating, the lowest investment-grade tier, with a stable outlook. The assessment reflects the government’s steady progress in repairing its finances since the Covid-19 pandemic, de Guzman said. 

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Earlier this month, Bloomberg News reported that policymakers had been preparing for the fiscal deficit to widen by as much as 50 basis points to 4.8% of gross domestic product in the current financial year-ending March 2027. De Guzman didn’t specify how much deterioration Moody’s would consider consistent with India’s current rating. 

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He expressed confidence in New Delhi’s ability to stay on a conservative path to reduce its budget deficit. India expects the gap to narrow to 4.3% by March 2027, from a record high of 9.2% in fiscal 2021.

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Concerns over India’s fiscal outlook intensified this year following a surge in crude prices due to the Middle East conflict. Higher oil prices tend to widen India’s import bill, fuel inflation and increase subsidy pressures, posing risks to growth and the fiscal outlook. 

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The picture has improved in recent weeks following the slide in oil prices amid US-Iran peace talks. There’s growing optimism among some policymakers that a sustained de-escalation in the Middle East could improve India’s outlook. 

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Nagesh Kumar, an external member of the Reserve Bank of India’s monetary policy committee, told Bloomberg in an interview last week that the economy could grow by more than 7% this year if global crude prices remain around $70 a barrel.

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Yet, high debt-servicing costs leave India with less fiscal room to respond to economic shocks than similarly rated sovereigns, making debt affordability the country’s main credit weakness, de Guzman said. 

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“Debt affordability for India is materially worse than all other investment-grade countries,” he added. Moody’s expects interest payments to consume about 23% of federal and state government revenue this year, compared with a median of less than 10% for similarly rated sovereigns like Italy, Oman, Mexico, and Greece.

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The ratings agency retained its forecast for India’s economy to expand 6% in the year through March 2027 while assuming oil prices will average above $95 a barrel in 2026. Moody’s expects disruptions to shipping through the Strait of Hormuz tp persist into autumn despite recent progress in US-Iran negotiations, de Guzman said.

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