Inflation weighs on Indias sovereign ratings Recurrent inflationary pressures have constrained Indias sovereign rating as they keep domestic capital costs high, erode domestic purchasing power as well as savings and lower international competitiveness, global ratings agency Moodys Investor Service said on Thursday . It said the economy is poised for an acceleration in growth, based on expected policy reforms and robust investor sentiment. Moodys has a Baa3 rating on India with a stable outlook, which is the lowest investment grade rating. “However, inflation remains high from a global standpoint, weighing down an otherwise promising economic recovery,“ the agency said. Stubborn inflation has remained as a policy headache for the government. Persistent high food inflation has been a challenge, prompting the government to announce a string of measures to tame price pressures. High inflation has forced RBI to keep interest rates high. Moodys said food inflation in India is much higher than the global average and is a key contributor to Indias overall inflation, as food comprises a significant portion of the average consumer basket.Indias large, young population and rising wages among low earners, who spend most of their incomes on food, have raised demand for food. “However, the supply response has been weak due to poor irrigation and rural infrastructure, sub-optimal fertilizer use, and conversion of agricultural land to alternative uses. Inefficiencies in the government-directed food distribution system have exacerbated food supply constraints,“ the agency said. It said authorities recognize that the current recovery will be difficult to sustain if inflation persists and ac knowledge the policies unveiled by the government to fight price pressures. “While these policies may alleviate the food-price spikes stemming from lower food output due to this years relatively weak monsoon, they do not address the long term widening of the gap between demand for food and supply .“ It said whether the gap is bridged would depend on the implementation of government plans to increase spending on rural infrastructure, reorient fertilizer subsidies to encourage optimal usage, and restructure the Food Corporation of India, which is responsible for executing the governments food-grain procurement and storage operations. Moodys said if the gap between food demand and supply does not narrow, food costs will keep mounting.“And as growth picks up, the increasing cost of food could more quickly feed into rising wages, leading eventually to higher non-food inflation as well,“ the agency said.
Posted on: Fri, 29 Aug 2014 11:16:20 +0000