No Moody swing, but no upgrade soon

Moody's has issued an equivocal report on India, affirming its resilience to external shocks while flagging the affordability of its debt burden. The two issues are linked by GoI's tax stimulus to prop up consumption that impedes revenue growth and makes it tougher to trim debt. Moody's weighs in with Fitch in retaining their credit ratings for India (BBB-) against an upgrade by S&P (BBB). The upshot is growth alone will not sway rating actions, it must be accompanied by more vigorous fiscal correction. This can be contested by the argument that fulfilment of necessary conditions brings sufficient conditions within reach.

The Moody's rating also sees US policy changes as having a limited immediate impact on India's growth, but there are medium-term risks to India's ability to add value to its exports. Punitive US tariffs are expected to be lowered as trade negotiations reach an acceptable settlement. But investment decisions will take their cue from the direction of US policy. Investment from the US will be affected by restrictions on immigration and outsourcing, yet, it opens opportunities for India to explore with other countries. Trade fragmentation in the wake of US protectionism will craft a coping mechanism by the rest of the world, where India's factor endowments will find their place.

India is expected to contain its fiscal deficit gradually while managing to restrict slippage on the current account. These conditions lend stability to the Moody's ratings outlook but do not call for a change in the status quo. The conditions that would trigger an upgrade are not likely to emerge in the short term. For now, India will have to live with a split view by rating agencies. While this keeps the cost of capital higher, it allows a greater play to domestic savings in funding the economy's growth. This should speed up wealth creation in the country.