India’s credit worthiness to be stable in 2023, but upcoming elections could keep social spending elevated: Moody’s

• India’s sovereign credit worthiness in 2023 will remain stable, in line with the rest of the Asia Pacific region, according to credit rating agency Moody’s.
  
• India’s relatively larger institutional investor base and banking system compared to some of its counterparts in the Asia-Pacific region has helped in keeping debt affordable, the agency said.
  
• However, the approaching 2024 general elections could dissuade the government from announcing social spending cuts.
  

India’s sovereign credit worthiness in 2023 will remain stable, in line with the rest of the Asia-Pacific region, according to credit rating agency Moody’s. However, the approaching elections in 2024 could result in social spending remaining elevated.

India’s relatively larger institutional investor base and banking system compared to some of its counterparts in the Asia-Pacific region has helped in keeping debt affordable, said the Moody’s report.

“Negative credit effects will also be less pronounced for frontier and emerging markets with a significant degree of concessional financing, including Bangladesh and Fiji, and those with deep domestic funding, including India, Malaysia and Thailand,” the agency said in its report.

Further, the agency also says that the currency depreciation against the US dollar will ease in 2023, which will benefit countries like India, which count crude oil amongst its largest imports.

“Currency depreciation will ease, reducing uplift to inflation. As the drivers of high inflation – particularly prices of energy and agricultural goods – begin to taper, import bills for net commodity importers will stabilise,” the report added.

For context, the Indian rupee has depreciated 10.9% in the last one year against the US dollar, as the greenback gained against currencies of most major economies of the world.

Elections in 2024 to constrain structural reforms

However, approaching elections in 2024 could play spoilsport as the Indian government gets freer with social spending and the scope for structural reforms gets limited.

“Countries such as Bangladesh, India, Indonesia and Maldives will have elections in 2023 or 2024, constraining their capacity to enact further structural reforms without the prospect of social resistance,” Moody’s said.

India’s next general election is tentatively scheduled for April-May 2024. This also means that the upcoming Budget 2023 will be the final full budget of the current government, limiting the scope for social spending cuts.

Outlook for APAC: Stable overall

The ratings agency maintained an overall positive outlook for the Asia-Pacific region, saying that the region’s debt and financial stability remain anchored while the gross domestic product (GDP) growth is expected to stabilise closer to the potential of the region after the post-pandemic shock.

“Our outlook for sovereign creditworthiness in Asia-Pacific (APAC) for 2023 is stable overall, contrasting with our negative outlook for sovereigns globally,” said the Moody’s report.

The report adds that the region is expected to perform better than other sovereigns globally, despite the higher global inflation and tighter financial conditions, as central banks around the world are working to control liquidity.

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