India can withstand a potentially wider-than-forecast fiscal deficit this year without jeopardising its investment-grade rating, according to Moody’s Ratings, as higher energy prices are expected to pose only temporary budget pressures.
“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 with Bloomberg News.
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.
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 per cent 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.
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 per cent by March 2027, from a record high of 9.2 per cent in fiscal 2021.
Concerns over India’s fiscal outlook intensified this year following a surge in crude prices due to the West Asia 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.
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 West Asia could improve India’s outlook.
Nagesh Kumar, an external member of the RBI's monetary policy committee, told Bloomberg in an interview last week that the economy could grow by more than 7 per cent this year if global crude prices remain around $70 a barrel.