Moody’s analyst Aninda Mitra says that the risks facing the Indian economy have grown, due to high oil prices, increasing fiscal deficits (including off-budget items) and “pent-up price pressures.” The government’s ratings (Baa3 for foreign currency and Ba2 for local currency) are unchanged, but under scrutiny. The risk is of tighter monetary policy and a “sharp deceleration in growth.”
Meanwhile, Fitch Ratings recently reduced its outlook on India’s long-term local currency borrowings in to “negative” from “stable” because of the government’s worsening fiscal position.
Interestingly India has never come close to defaulting on its domestic debt. The risks are to investment and growth. Tax receipts continue to be strong, but expenditure quality has not improved. Pushing ahead with financial sector reforms may be a politically feasible way to get some more efficiencies into the economy, and counteract the problems with inflation and deficits.
Note that the increased risks are not of an external crisis, but problems with sustaining growth. I think the Indian government has a large number of policy reforms to implement that can fuel domestic growth, by giving the private sector more room to expand.
After four years of worrying mostly about equity, the government should push for policies that will allow the economy to grow out of its problems.