Moody's maintains stable outlook on India

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Moody's will retain its 'stable' outlook on India, expecting economic growth to improve on the back of consumer demand, although the country is still constrained by its fiscal deficit, an analyst at the ratings agency said on Wednesday.

The views stand in contrast with Standard & Poor's and Fitch Ratings, both of which cut their outlook on India to 'negative' in 2012, citing concerns about the pace of reforms and the government's fiscal deficit among some of the key factors.

Recent actions by the government to undertake key reforms showed some determination to take unpopular steps, Atsi Sheth, vice-president of the sovereign risk group at Moody's Investors Service, said in a conference call with reporters.

The government announced a series of reforms this month, including a rise in diesel prices, the liberalisation of retail trade, and a bailout for the power sector.

However, Sheth added Moody's still expected the country to overshoot a fiscal deficit target of 5.1 percent of gross domestic product for 2012-13 fiscal year ending March.

"It (fuel price increase) does show the government is ready to embrace policy changes that may not be politically popular, but in the end move towards raising prices to levels commensurate with what they are globally," she said.

Moody's, which has a Baa3 rating on the sovereign, expects growth to turn around in the medium term as private investments pick up, driven mostly by domestic consumption.

India's quarterly GDP growth of 5.5 per cent for April-June was its slowest in nearly three years and a far cry from near double digit growth seen before the 2008 global financial crisis.

The slowing economy along with India's wide deficits, including in its current account, sparked the downgrade threat from S&P and Fitch.

All three agencies currently have India at the lowest investment-grade rating.

The proposed government measures sparked a rally in Indian markets, but investors still want to see signs of fiscal discipline by the government.

India will likely borrow an additional 500 billion rupees for the year ending in March and post a fiscal deficit of 5.8 per cent, a poll showed.

"A credit challenge for India is its fiscal positions," Sheth said adding Moody's will wait to see more efforts towards ensuring that India's fiscal position is less vulnerable to slowdown in economic growth.