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Moody's upgrades India's currency debt ratings

Moody's Investor Services has upgraded its oulook on India's foreign and domestic currency debt ratings, stating that the National Democratic Alliance government has a fresh chance to make market-oriented changes at the start of what could be a longer term in office.

In its latest report on India, the US-based rating agency raised the outlook to positive from stable for the country's Ba2 ratings on these two fronts.

Besides increased chance of economic reforms picking up pace, the premier rating agency attributed rise in the outlook to India's ability to withstand last year's emerging markets crises and nuclear sanctions as well as the improved maturity structure of its external debt.

Signs of industrial growth recovering after three years of weak performance indicate that corporate restructuring is paying off, especially in the private sector, where companies are focusing increasingly on their core competencies, the report said.

Moody's said the oft-repeated remarks on the irreversibility of economic reforms contain more than a grain of truth -- the problem has been more the pace of this reform rather than its path.

The agency also pointed out to the troublesome structural challenges that constrain India's rating, particularly heavy public debt and debt service burden, labour market and bureaucratic rigidities, infrastructure shortfalls, and heightened regional tensions with Pakistan.

Budgetary imbalances are pervasive at all levels of the public sector, the report noted. Although the government consistently aspires to a more prudent fiscal policy, the reality nearly always disappoints, it said.

The report said analysts remain concerned that India's large trade and current account deficits, which have increased its dependence on potentially volatile capital inflows, might widen further in the near to medium-term.

Moody's report indicates that country's macro-economic policy framework has placed too little emphasis on achieving concrete results despite decades of economic plans.

Over the medium term, India's growth rate will need to be higher than the roughly six per cent average of the 1990s, and in fact, even faster than the government's usual seven per cent target, in order to raise average living standards.

The increase in tempo that has characterised recent government pronouncements on economic policy, however, indicates at least its intention to devote new energy to addressing structural problems, the report said.

The opening of the insurance sector to foreign investors and a more aggressive divestment agenda for public sector enterprises could strengthen foreign investment flows, but these changes would need to be complemented by further modernisation and liberalisation of the banking system and capital markets.

Finally, Moody's believes that enhanced political stability will be crucial to reinforce these efforts and to maintain the reform momentum over the next several years.

UNI

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