Moody’s warns on growing economic risks

Secondly, such pressures could be due to the rising risk of fiscal spillovers to India’s external accounts; such spillovers, if large enough, could weaken the case for the two-notch gap between its foreign currency and local currency ratings. Also, outlook for reform remains uncertain, even as Congress Party-led administration has seen off its leftist partners and re-shuffled its coalition.

“Higher oil prices and the lack of adequate fiscal policy reactions amidst high pent-up price pressures are putting the burden of macro-economic adjustment on the monetary authorities,”Mitra said. “As a result, policy as well as market interest rates could rise, and a sharp deceleration in growth may follow.”

Concurrently, greater government borrowing needs, while not leading to a material deterioration of its key credit metrics, would likely prevent an improvement in the remainder of FY08-09, contrary to our earlier expectation, Moody’s said. Mitra made his remarks in conjunction with the release of a new report on the outlook for India’s sovereign ratings.

Fitch Ratings had recently lowered India’s rating outlook to negative from stable.

What’s troubling Indian economy

•Higher oil prices and the lack of adequate fiscal policy reactions

• Inability to raise fuel prices and reduce reimbursements to oil cos

• High pent-up price pressures

• Deterioration in govt’s debt metrics and its access to external liquidity

• Rising risk of fiscal spillovers to India’s external accounts

• Outlook for reforms remain uncertain