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LATEST NEWS UPDATES | India's vulnerability to drought poses credit challenges: Moody's

India's vulnerability to drought poses credit challenges: Moody's

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published Published on Aug 12, 2015   modified Modified on Aug 12, 2015
-India Infoline News Service
 
Mumbai: Efforts at the central and state government level to improve rural infrastructure, food distribution and non-agricultural employment opportunities are credit positive because, if sustained, they are likely to lower the credit challenges that India's vulnerability to drought poses.

Moody's Investor's Service says that although India (Baa3 positive) may avoid drought this year, its economy remains vulnerable to future droughts or fluctuations in rainfall, and its sovereign credit profile is more exposed to the negative effects of drought than those of most Baa rated sovereigns.
 
It notes that the efforts at the central and state government level to improve rural infrastructure, food distribution and non-agricultural employment opportunities are credit positive because, if sustained, they are likely to lower the credit challenges that India's vulnerability to drought poses.
 
The rating agency's conclusions are contained in its just-released report on the Government of India, entitled "India, Government of: Vulnerability to Drought Poses Credit Challenges".
 
The report compares India to several other countries in which agriculture has a material share of GDP, and concludes that the Indian economy's vulnerability to drought stems from the combination of five factors. These are (1) the relatively high share of agriculture in overall employment; (2) weak rural infrastructure and irrigation; (3) inefficient food distribution; (4) the large proportion of Indian household spending that goes towards food; and (5) the share of food subsidy costs in the government's fiscal deficits.
 
According to Moody's, because of the above characteristics, drought can simultaneously lower GDP growth, raise inflation and add to fiscal pressures, leaving India's sovereign credit profile more susceptible to the effect of drought compared to those of other Baa-rated sovereigns.
 
Moreover, India's economic exposure to annual fluctuations in rainfall constrains the ability of monetary policy to respond to ongoing macro-economic developments. This is particularly so in years such as the current one when a weak monsoon forecast coincides with an uncertain cyclical recovery.
 
The report points out that India's vulnerability to drought could decline over the longer term, as average incomes rise. But in the near to medium term, Moody's highlights that policies to improve infrastructure, food distribution, and non-agricultural employment opportunities hold the key to reducing the annual economic uncertainty that is linked to the performance of the monsoon.
 
The rating agency says that if these government efforts are sustained and successful over the next two to three years, they could lower India's vulnerability to drought. They would also benefit India's overall sovereign credit profile, because they would lead to higher incomes, stable and lower inflation, and a lower fiscal burden related to food subsidies.


India Infoline News Service, 11 August, 2015, http://www.indiainfoline.com/article/news-top-story/india-s-vulnerability-to-drought-poses-credit-challenges-moody-s-115081100398_1.html


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