India has strong external assets: Moody's

Indian economy is becoming increasingly robust and less vulnerable to the vagaries of rainfall as the country has modernised and its Baa3/Ba2 ratings reflect strong external assets position against outsized government deficits and debt, Moody's Investors Service said on Tuesday.

"The ongoing build up in official foreign reserves supports its investment-grade Baa3 foreign-currency rating for the country while large public sector deficits and debt restrains the government's domestic currency rating to a below-investment- grade Ba2," it said in its annual report on India.

"The outlook on the foreign currency rating is stable, whereas the lack of meaningful fiscal consolidation keeps a negative outlook on the domestic currency rating," Moody's said in an official release.

The Moody's report points out that the Indian economy remained fast-growing in 2004, "becoming increasingly robust and less vulnerable to the vagaries of rainfall as the country has modernised.

"India is increasingly linked with China as the two bellwethers of the world's economic and geopolitical future."

"The accumulation of foreign-exchange reserves has continued even though the current account has dipped back into deficit and non-resident Indian bank accounts are no longer growing," Moody's report said.

The rating agency explained that last year's national elections brought in a new government with mixed economic credentials: strong reformers at the top of a coalition that depends on left-leaning parties for parliamentary support.

In deference to these partners, some aspects of the previous government's market-oriented strategies have been put on hold, at times generating unease among generally enthusiastic investors.

Moody's noted that the recommendations of the Twelfth Finance Commission - mandating extra transfers from the central government to the states - were not offset by other spending cuts or revenue measures sufficient to comply with the deficit reduction goals of the Fiscal Responsibility and Budget Management Act in the current budget.

Also, sizeable government borrowing requirements amidst strong growth and rising private investment have led to higher domestic interest rates.

"This is noteworthy because it reverses one factor that had helped to ease fiscal pressures in the past few years. The government's budget situation continues to be a primary concern," Moody's said.