High GDP growth will contribute to gradually rising income levels and overall economic resilience, which in turn, will support gradual fiscal consolidation and government debt stabilisation, albeit at high levels, Moody’s said.

The RBI has projected the country’s real GDP growth at 6.5 per cent in the fiscal 2024.

While the Moody’s report highlighted the stronger macro policy effectiveness, it flagged the weakening institutions and rising political tensions.

“One recent event illustrative of these trends is the eruption of unrest in the north-eastern state of Manipur—one of the most impoverished states in India—that has led to at least 150 deaths since May 2023, and underpinned a no-confidence vote on Prime Minister Narendra Modi in August, although this was ultimately unsuccessful… Although elevated political polarization is unlikely to lead to a material destabilization of government, rising domestic political tensions suggest an ongoing risk of populist policies — including at the regional and local government levels — amid the prevalence of social risks such as poverty and income inequality, as well as inequitable access to education and basic services,” the agency said in its note.

Also, the periodic flaring of border tensions with neighbouring countries was an outlier among sovereigns assessed as having a lower overall susceptibility to political risk, it added.

In its latest note, Moody’s said it expects India’s economic growth to outpace all other G20 economies through at least the next two years, driven by domestic demand. It said the government’s ongoing emphasis on infrastructure development, mirrored in the increasing share of capital expenditure in the Union Budget has led to tangible improvements in logistic performance and the quality of trade and transport-related infrastructure.

This has complemented the government’s implementation of its digital public infrastructure—which has entailed the widespread adoption of digital payments and data exchange—in enhancing the efficiency of public service delivery, while also boosting the formalization of the economy and broadening the tax base, it said.

Moody’s said the fundamental improvement in the banking system’s financial soundness over the last three years has also allowed the private sector to leverage buoyant domestic sentiment and channel funding towards capital formation beyond the immediate rebound from the pandemic, as evidenced by the robustness of credit growth.

It said over the longer term, constraints on the economy’s ability to deliver a significant increase in manufacturing and improvements in job creation will limit potential growth.

Despite some upside pressures on spending to help the economy cope with higher inflation, the government has been able to meet its fiscal deficit targets at the central government level over the past two years, aided by buoyant tax revenue, it said.

The restoration of robust growth prospects post pandemic, the effective commitment to inflation targeting and the rehabilitation of the financial system aided by reform supports Moody’s view of strengthening monetary and macro policy effectiveness.

Obligations rated Baa are subject to moderate credit risk; Baa3 is the lowest rating in the investment grade. The Baa obligations are considered medium-grade and as such may possess speculative characteristics, according to Moody’s ratings scale.

In 2017, Moody’s had raised India’s sovereign rating to Baa2 for the first time since 2004 but downgraded it to Baa3 in 2020.