Global challenges won’t dent India’s recovery: Moody’s

Rating firm lowers 2022-23 growth forecast to 7.6%, expects inflation to average 6.8%

Global rating firm Moody’s Investors Service said on Tuesday that it does not expect the rising challenges facing the global economy, such as the fallout of the Russia-Ukraine military conflict, higher inflation, and tightening financial conditions to derail India's ongoing recovery from the pandemic in 2022 and 2023.

While it lowered its growth forecast for the Indian economy in 2022-23 to 7.6%, citing higher inflation, rising interest rates, uneven monsoon distribution, and slowing global growth as dampeners for ‘economic momentum on a sequential basis’, Moody’s said the risks from negative feedback between the economy and the financial system are receding and reiterated its Baa3 credit rating for India’s sovereign.

“While risks stemming from a high debt burden and weak debt affordability remain, we expect that the economic environment will allow for a gradual narrowing in the general government fiscal deficit over the next few years, avoiding further deterioration in the sovereign credit profile,” the firm said in a credit opinion update.

The agency expects real GDP growth of 6.3% in 2023-24, while inflation is projected to average 6.8% through this fiscal and 5% next year. Moody’s also reckoned that India’s current account deficit this year will surge to 3.9% of GDP from 1.2% in 2021-22, and remain high at 3% of GDP in 2023-24.

“We expect inflationary pressures to weaken in the second half of 2022 and further into 2023, while high-frequency data shows strong and broad-based underlying momentum in the services and manufacturing sectors, according to hard and survey data, such as PMI, capacity utilisation, mobility, tax filing and collection, business earnings and credit indicators. As such, we continue to see India as the fastest-growing economy among its G20 peers in both 2022 and 2023,” Moody’s noted in the update.

While the agency listed out India’s large and diversified economy with high growth potential, stable domestic financing base for government debt and relatively strong external position as its credit strengths, it identified the country’s high general government debt and limited government effectiveness in mitigating key credit challenges as a weak spot.

Predicting that India’s ‘growth volatility’ would ‘return to pre-pandemic levels’, Moody’s said the very large domestic market has provided strong demand-driven growth and helped ‘shelter the economy from fluctuations’ in global demand. It, however, flagged India’s high exposure to climate change risks, such as the farm sector’s critical dependence on monsoon rains as half the land under cultivation lay unirrigated, while excessive groundwater use and rising temperatures had exacerbated scarcity challenges.