Global rating agency Moody’s Investors Service on Friday cut India’s outlook from ‘stable’ to ‘negative’ reflecting increasing risks to the country’s economic growth and the government’s failure in addressing long-standing economic and institutional weaknesses.
The government, however, said that India continues to be among the fastest growing major economies in the world, and its relative standing remained unaffected.
Moody’s only adds to the growing list of global agencies, including the Reserve Bank of India, that have downgraded the India growth story for the same reasons. Fitch Ratings and S&P Global Ratings still hold India’s outlook at ‘stable’.
Moody’s also affirmed India’s Baa2 foreign-currency and local-currency long-term issuer ratings. Baa2 is the second-lowest investment grade score, and the agency said it could downgrade the nation if fiscal metrics deteriorate materially.
Warning that India could be heading for a debt trap and recessionary phase, the agency said it doesn’t expect the credit crunch among non-bank financial institutions, the main source of consumer loans in recent years, to be resolved quickly.
At a six-year low, India’s economy grew only 5.0 per cent year-on-year between April and June, its weakest pace since 2013, as consumer demand and government spending slowed amid global trade frictions.
Backing its other ratings for India, the agency said it estimates that the country’s growth slowdown is in part long-lasting.
However, the Finance Ministry rejected the claim, saying: “India continues to be among the fastest growing major economies in the world, India’s relative standing remains unaffected. IMF in their latest World Economic Outlook has stated that the Indian economy 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, assessment by IMF and other multilateral organisations continue to underline a positive outlook on India.”
“The government has undertaken a 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 the near and medium term,” the Finance Ministry add.
The downgrade now puts additional pressure on India, which tried to revive demand in the economy in September with an unexpected cut in corporate taxes. But chances of more such reforms have diminished, and Moody’s expects the government to struggle to narrow its deficit or contain a growing debt burden.
According to Moody’s, “investors and rating agencies will closely monitor the nation’s gross domestic product data (for Q2) for signs of further and long-lasting weakness, which could result in another negative shift. Stabilisation in the non-bank financial sector, meantime, would be credit positive and could flag less risk of negative spillover into banks”.
“Moody’s decision to change the outlook to negative reflects increasing risks that 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 Moody’s had previously estimated, leading to a gradual rise in the debt burden from already high levels,” the rating agency said in a statement.
“While government 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), had increased the probability of a more entrenched slowdown,” it said.
Moody’s has also cut India’s GDP growth forecast for the current year to 6.2 per cent, citing factors such as weak hiring, distress among rural households and tighter financial conditions.
Almost every major global financial institution has trimmed India’s growth forecast ever since the country’s GDP growth rate slipped to a six-year low of 5 per cent in the April-June quarter and the Reserve Bank of India (RBI) slashed GDP growth estimate for the current fiscal to 6.9 per cent from the previous estimate of 7 per cent, in the wake of slowdown in demand and investment.
The International Monetary Fund (IMF) last month slashed India’s GDP growth rate projections to 6.1 per cent from the 7 per cent it forecast in July.
S&P Global Ratings last month also lowered India’s Gross Domestic Products (GDP) forecast to 6.3 per cent for the current financial year from 7.1 per cent projected earlier, on the back of decline in private consumption.
“India’s slump is deeper and more broad based than we expected. In the March-June quarter, the economy expanded by just 5 per cent, below potential, which we estimate to be north of 7 per cent. Most alarming has been the precipitous decline in private consumption growth that had been the engine of the economy in recent years – down to about 3 per cent in the March-June quarter,” the global rating agency said in a recent report on the Asia-Pacific region.
On the government’s effort to revive economy through cut in corporate taxes, it said it would cost the exchequer 0.7 per cent of the GDP, though the net impulse would be smaller, with the government eliminating some exemptions.
The Asian Development Bank had in July slashed India’s growth projection to 6.5 per cent from 7 per cent for the current year on the back of fiscal shortfall concerns.
The World Bank has cut India’s GDP growth for 2019-20 to 6 per cent in its latest South Asia Economic Focus report. “India’s cyclical slowdown is severe,” said the report. It has projected the growth rate for 2020-21 at 6.9 per cent, and for 2021-22 at 7.2 per cent .
In April, the World Bank had forecast a growth rate of 7.5 per cent for India, but in 2018, it pegged the rate lower at 6.8 per cent.
The indicators from other rating agencies started coming in June, when Fitch Ratings cut India’s growth rate projections to 6.6 per cent from 6.8 per cent. Later on September 20, the Organisation for Economic Co-operation and Development (OECD) also revised its forecasts for India, lowering it by 1.3 percentage points from its previous projection in May to 5.9 per cent.