Mumbai, Sept. 3: Global rating agencies remain cautious even as the economy grew at its best pace in more than two years during the first quarter of the current fiscal.
Moody’s today said though the economy was headed for recovery, fiscal deficit and the inflation outlook restricted the chances of any sovereign upgrades.
The international credit rating agency has a Baa3 rating on India, the lowest investment grade, but with a stable outlook.
In a note issued from Singapore, Moody’s said though the government could meet its fiscal deficit target of 4.1 per cent of the gross domestic product (GDP) set for this fiscal, the fiscal position would remain vulnerable to future cyclical downturns and external shocks.
According to Moody’s, the higher growth numbers seen in the first quarter will help to improve tax revenues and capital flows into the country; it can also help to reverse the weakening metrics that had occurred in the fiscal and external positions in recent years.
It said the macro-economic outlook would improve if the government was able to “implement policies that ease inflationary pressures and increase infrastructure investment”, pointing out that sticky inflation and infrastructure issues were two of the major problems that the Centre should tackle.
“While stronger growth in this large and diverse economy will help counterbalance these credit challenges, they limit further upward momentum in the sovereign rating,” Moody’s noted.
These observations come days after first-quarter GDP data showed the economy to grow at 5.7 per cent. The current account deficit (CAD) also came in lower at 1.7 per cent of GDP.
The government has set a 4.1 per cent fiscal deficit target for the current fiscal, but has already exhausted over 61 per cent of the target in the first four months.
According to the agency, the 5.7 per cent GDP number in the April-June period is in line with its “long-held view that growth deceleration to sub-5 per cent levels over the past two years would reverse over time”.