US-Iran war: Moody’s confident India can withstand fiscal deficit target breach

US-Iran war impact: India is well positioned to absorb a fiscal deficit that may be more than the current projections this year without putting its investment-grade sovereign rating at risk, according to Moody's Ratings, which believes that any budgetary pressure arising from higher energy prices is likely to be temporary.This year, concerns over the country's fiscal outlook intensified after crude oil prices surged amid the conflict in the Middle East. Higher oil prices typically increase India's import bill, add to inflationary pressures and raise subsidy costs, creating challenges for both economic growth and the government's fiscal position."We don't see India as being particularly affected because this shock is largely negative for most sovereigns," Christian de Guzman, Senior Vice President at Moody's Ratings based in Singapore, said according to a Bloomberg report.Moody's currently rates India at Baa3, the lowest level within the investment-grade category, with a stable outlook. According to de Guzman, the rating reflects the government's consistent progress in strengthening its fiscal position since the Covid-19 pandemic.Earlier this month, Bloomberg News reported that policymakers were preparing for the fiscal deficit to widen by as much as 50 basis points to 4.8% of gross domestic product during the current financial year ending March 2027. De Guzman, however, did not indicate the extent of any fiscal deterioration that Moody's would still consider compatible with India's existing rating.He said he remains confident that the government will continue pursuing a prudent fiscal consolidation path. India has projected that its fiscal deficit will narrow to 4.3% by March 2027, down from the record 9.2% recorded in FY2021.The outlook has improved in recent weeks as crude oil prices retreated amid ongoing peace negotiations between the United States and Iran. The easing in tensions has strengthened optimism among some policymakers that a lasting de-escalation in the Middle East could improve India's economic prospects.In an interview with Bloomberg last week, Nagesh Kumar, an external member of the Reserve Bank of India's Monetary Policy Committee, said the Indian economy could expand by more than 7% this year if global crude oil prices remain close to $70 a barrel.Despite the improving outlook, India continues to face constraints due to elevated debt-servicing costs, which limit its fiscal flexibility compared with other countries carrying similar sovereign ratings, said Christian de Guzman of Moody's. According to him, debt affordability remains India's most significant credit challenge."Debt affordability for India is materially worse than all other investment-grade countries," he said. Moody's estimates that interest payments will account for nearly 23% of the combined revenue of the Centre and states this year, compared with a median of less than 10% for similarly rated sovereigns such as Italy, Oman, Mexico and Greece.The ratings agency has maintained its forecast of 6% economic growth for India in the financial year ending March 2027, based on an assumption that average crude oil prices will remain above $95 per barrel during 2026. De Guzman added that Moody's expects disruptions to shipping through the Strait of Hormuz to continue into the autumn, despite recent progress in negotiations between the United States and Iran.Get the latest business news and top stories. Download the TOI App.Ready to Make a Smarter Property Decision? Build Your Legacy with TOI Homes.