Whalesbook
Moody's Ratings has identified India as the most resilient large emerging market economy since 2020. The agency cited India's strong foreign exchange reserves and credible monetary policy for managing global shocks. While these factors help India face future economic turbulence with anchored inflation and a flexible exchange rate, the report also highlights significant fiscal challenges.
India has absorbed shocks like the COVID-19 pandemic, inflation surges, and geopolitical tensions without a major increase in borrowing costs or losing market access. This resilience stems from improved policy frameworks and significant buffer accumulation. Forex reserves, around $704.89 billion in September 2024, have boosted confidence and smoothed currency fluctuations. Clear monetary policy further supports managing external pressures without sudden shifts, enabling India to maintain market access and avoid the financing stress seen elsewhere.
However, Moody's report also highlights India's fiscal weaknesses. A high government debt burden and weak fiscal balance significantly limit the country's ability to respond to shocks. General government debt is expected to remain above 80% of GDP long-term. For comparison, Brazil's debt-to-GDP was about 79.10% in 2022 and South Africa's was 73.00%. India relies on domestic funding through deep local markets. Mexico, however, had a debt-to-GDP ratio of 104.79% in 2022, showing varied fiscal constraints among nations. Moody's warns that government spending measures, combined with global economic uncertainty, could hinder debt reduction and worsen borrowing costs. This fiscal constraint is particularly relevant given the historical impact of external shocks; for example, the US-imposed tariffs in 2025 led to significant market volatility and declines in the Nifty 50 and Sensex.
Key Fiscal Weaknesses
The persistent high debt burden and limited fiscal room are India's main structural weakness. While forex reserves help manage currency fluctuations, they don't stop depreciation during long shocks. The debt-to-GDP ratio, over 80%, restricts the government's ability to use stimulus spending during economic downturns. Unlike advanced economies, emerging markets like India often have less fiscal space due to past crises and global monetary tightening. Geopolitical risks, like the West Asia conflict, could increase inflation and require more government spending, potentially widening the current account deficit due to higher import costs for energy and fertilizers. If deficit reduction efforts fail or growth falls short of forecasts, India's credit rating could face downward pressure.
Moody's holds a stable outlook for India, noting its strong growth prospects compared to other nations and improved fiscal figures since the pandemic. However, the agency forecasts GDP growth to slow to about 6% in fiscal year 2027, from an estimated 7.3% in fiscal 2026, due to external factors. Inflation is also expected to increase to 4.8% in fiscal 2027, up from 2.4% in fiscal 2026, partly because of geopolitical events. While digitalization, infrastructure projects, and financial reforms support the economy, high debt levels and the need for steady deficit reduction mean the government has limited room for strong policy actions against future shocks.