Moody’s India Rating: Moody’s downgrades India for the first time in 22 years | India Business News
Moody’s downgrade comes almost 22 years after India’s rating was downgraded on June 19, 1998 after the country’s nuclear tests. The downgrade from Baa2 to Baa3 places it on par with S&P and Fitch, which rate India at BBB (less), the lowest investment grade.
The downgrade comes against the deterioration of the country’s growth prospects as the national shutdown is revealed to curb the spread of the Covid-19 pandemic that has paralyzed economic activity. This has also choked off revenues, including those from GST, prompting the government to dramatically increase its market loans, which economists say will widen its fiscal deficit to around 5.5% of gross domestic product. Moody’s stock is likely to put pressure on the rupee, increase borrowing costs and decrease investor sentiment, which has already spread due to the impact of the pandemic in all major world economies.
While today’s action is being taken in the context of the coronavirus pandemic, it was not driven by the impact of the pandemic. Rather, the pandemic amplifies the vulnerabilities in India’s credit profile that were present and under construction prior to the crash, and that motivated the allocation of a negative outlook last year, ”the agency said.
“The slow momentum of reform and limited political effectiveness have contributed to a prolonged period of slow growth, compared to India’s potential, which started before the pandemic and which Moody’s expects to continue well beyond,” said Moody’s.
The agency said that GDP growth slowed from a peak of 8.3% in fiscal 2016 (ending March 2017) to 4.2% in fiscal 2019 and expects India’s GDP to contract by 4.0%. in fiscal year 2020 due to the impact of the coronavirus pandemic and related blockade measures, followed by growth of 8.7% in fiscal year 2021 and closer to 6.0% thereafter.
He said that thereafter and in the long term, growth rates are likely to be materially lower than in the past, due to persistent weak private sector investment, lukewarm job creation and a deteriorating financial system. The agency said that, in turn, a prolonged period of slower growth may slow the pace of improvements in living standards that would help support further sustained growth in investment and consumption.
“While the government responded to the slowdown in growth before the coronavirus outbreak with a series of measures aimed at stimulating domestic demand, and recently announced a support package aimed at supporting the most vulnerable households and small businesses in India, Moody’s does not expect these measures to permanently restore real GDP growth at rates of around 8%, which appeared to be within reach just a few years ago, ”the statement said.
The government unveiled a series of measures to address the impact of the economy, as well as announced reform steps to build the foundations for solid growth. “While achieving the goals set out in these announcements would be positive for credit, the challenges with implementing previous reforms suggest that the benefits for medium-term growth are likely to be less than anticipated,” Moody’s said.
He said that lower growth in real and nominal GDP in the medium term will decrease the government’s ability to reduce its debt burden, after a significant increase as a result of the coronavirus economic shock. A mixed record of implementing revenue-raising measures reduces the prospects for fiscal policy-driven budget consolidation, amplifying a long-standing weakness in India’s credit profile, the agency added.
Measures to improve India’s fiscal soundness, which were at the heart of the government’s policy framework a few years ago, have proved insufficient. Fiscal performance in recent years has been weaker than expected, with consistently unfulfilled fiscal deficit targets and a persistent lack of clarity on how fiscal consolidation targets would be achieved in the medium term. Instead of starting to fall, the debt burden remained around 70% of GDP, “said Moody’s.
“Overall, with very limited room for absolute fiscal consolidation, prospects for India’s debt burden will depend on trends in nominal GDP growth and are unlikely to decline unless growth accelerates from marked and sustainable way above 10%, “he said.
Moody’s kept the outlook on India’s rating negative by saying it reflects mutually reinforcing downside risks due to potentially deeper strains on the economy and financial system that could lead to more severe and prolonged erosion in fiscal strength that the agency currently projects.