Moody's Investors Services on Tuesday gave a speculative grade rating to India's domestic-currency debt on account of the government's heavy borrowings, while doubting sustainability of nine per cent GDP growth.

"I don't think the nine per cent GDP growth for India is sustainable. This is due to capacity bottlenecks," Kristin Lindow, vice president, Moody's told reporters in Mumbai, while unveiling the agency's annual report on India.

The Ba2 domestic-currency rating, two notches below investment grade, was based on heavy public debt constraints, but the rating outlook is stable.

"India's robust economic momentum seems to defy the constraints posed by inadequate social and physical infrastructure and an extremely inefficient government sector," Lindow said in a statement issued separately.

The Planning Commission, in its approach paper to the 11th Plan (2007-12), has set an average growth target of nine per cent. In the first half of the current fiscal, India's GDP expanded by 9.1 per cent.

Shortage of skilled workers and infrastructure would inevitably begin to rein in India's growth rate, Lindow said.

Except for some specific sectors of the economy, such as information technology, aerospace and communications, Indian productivity levels in absolute terms tend to be quite poor but they are improving, even in manufacturing, she added.

However, she said that in spite of capacity constraints that were now biting, Moody's expects that India's growth rate would be able to stay above its roughly 6.5 per cent long-run potential for the next year or two, mainly because of the ongoing availability of external liquidity to finance the growing current account deficit.

Maintaining that there were signs of overheating in the Indian economy such as growth in consumer credit, she said that inflation would remain above the central bank's comfort zone of 5-5.5 per cent due to tendency to accommodate current growth momentum in the economy.

The high inflation might well be a result of the trade-off for fast growth in the context of increasingly binding capacity constraints.

"Monetary policy has been tightening gradually for more than two years, along with the fiscal stance, yet ample portfolio and other capital inflows have diminished the efficacy of these measures," Lindow said.

The rating agency observed that the public finances remained extremely weak, although they were recently improving. However, it is "too early to declare success given risks."

Stating that sustaining fiscal consolidation would not be easy for India over the next several years despite the obvious progress, the report said high debt levels, low revenue receipts and entrenched spending patterns would create a serious lack of fiscal flexibility.

However, the report rates the foreign currency debt at Baa3, two notches higher than the local currency rating.

The Moody's report said that coalition politics had hindered progress on economic reform in India since the change in government in May 2004, mainly but not exclusively due to the United Progressive Alliance government's dependence on the reform-averse Left Front parties for Parliamentary support.