Moody’s cuts India outlook to ‘Negative’

Shishir Sinha New Delhi | Updated on November 08, 2019

Says government has been partly ineffective in addressing economic weakness; action does not reflect fundamentals, says FinMin

Global rating agency Moody’s has announced changing the outlook on India’s economy to ‘Negative’ from ‘Stable.’ However, it has affirmed the sovereign rating of ‘Baa2.’

The change in outlook means that an upgrade in ratings in near future is unlikely.

‘Baa2’ is a notch above last investment grade. Outlook and rating are key considerations for foreign investors to make investment in any country.

The agency’s decision to change the outlook to negative reflects that the economic growth will remain materially lower than in the past, partly reflecting lower government and policy effectiveness at addressing long-standing economic and institutional weaknesses than it had previously estimated, leading to a gradual rise in the debt burden from already high levels.

“While government’s measures to support the economy, should help to reduce the depth and duration of India's growth slowdown, prolonged financial stress among rural households, weak job creation and, more recently, a credit crunch among non-bank financial institutions (NBFIs), have increased the probability of a more entrenched slowdown,” the agency said.

Further it mentioned that moreover, the prospects of further reforms that would support business investment and growth at high levels, and significantly broaden the narrow tax base, have diminished.

The agency has cautioned that if nominal GDP (Gross Domestic Product) growth does not return to high rates, the government will face very significant constraints in narrowing the budget deficit and preventing a rise in the debt burden.

India’s GDP growth rate slowed down to 5 per cent during first three months (April-June) of the current fiscal, and is likely to go down further during second three-month (July-September) period. This number will be made public at the end of this month.

Key to change the rating up

Moody's would likely change the rating outlook to stable if the likelihood that fiscal metrics would stabilise and improve over time increased significantly.

This would probably result from renewed indications that economic and institutional reforms would support sustained, strong investment and GDP growth, and broaden the government’s revenue base over the medium term.

In particular, at this juncture, a credible and durable stabilisation of the non-bank financial sector that reduced the possibility of negative spillovers to banks, and the restored strong credit provision to productive sectors would be credit positive.

Possible reasons for change

The agency would likely downgrade India's ratings if its fiscal metrics were increasingly likely to weaken materially.

This would probably happen if there is a prolonged or deep slowdown in growth, with only limited prospects that the government would be able to restore stronger growth through economic and institutional reforms.

A marked and long-lasting weakening in the financial sector’s health would raise the associated fiscal costs (should the government need to support some institutions) and increase the risk that the economic growth remains too low to prevent a rise in the debt burden.

Meaning of present rating

The Baa2 rating balances the India’s credit strengths including its large and diverse economy and stable domestic financing base for government debt, against its principal challenges including high government debt, weak social and physical infrastructure and a fragile financial sector.

India's long-term foreign-currency bond and bank deposit ceilings remain unchanged at Baa1 and Baa2, respectively.

The short-term foreign-currency bond and bank deposit ceilings remain unchanged at Prime-2. The long-term local currency bond and deposit ceilings remain unchanged at A1.

Proactive government, says Finance Ministry

Meanwhile, the Finance Ministry said that the government has noted the Moody’s action about change in the outlook.

However, it argued that India continued to be among the fastest growing major economies in the world, and that the nation’s relative standing remains unaffected.

The IMF in their latest World Economic Outlook has stated that India is set to grow at 6.1 per cent in 2019, picking up to 7 per cent in 2020.

“As India’s potential growth rate remains unchanged, the assessment by IMF and other multilateral organisations continue to underline a positive outlook on India,” it said.

Further, the government has undertaken series of financial sector and other reforms to strengthen the economy as a whole. The Government has also proactively taken policy decisions in response to the global slowdown. These measures would lead to a positive outlook on India and would attract capital flows and stimulate investments.

“The fundamentals of the economy remain quite robust with inflation under check and bond yields low. India continues to offer strong prospects of growth in near and medium term,” Ministry said

Published on November 08, 2019

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