Moody’s shocker to Modi govt

Cuts India's credit rating outlook to negative; says govt has been partly ineffective in addressing economic weakness

By Author  |  Published: 8th Nov 2019  11:48 pm

New Delhi: In a blow to India, Moody’s Investors Service has cut country’s credit rating outlook to negative — the first step towards a downgrade, saying the government has been partly ineffective in addressing economic weakness, leading to rising risks that growth will remain lower.

While foreign currency rating was retained at Baa2 — the second-lowest investment grade score, Moody’s projected fiscal deficit of 3.7 per cent of GDP in FY20, a breach of the government’s target of 3.3 per cent, as slower growth and a surprise corporate-tax cut curb revenue.

India’s growth outlook has deteriorated sharply this year, with a crunch that started in the non-banking financial institutions (NBFIs) spreading to retail businesses, car makers, home sales and heavy industries. “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.

India’s economy grew by 5 per cent between April and June, its weakest pace since 2013, as consumer demand and government spending slowed amid global trade frictions, it said.

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 NBFIs, have increased the probability of a more entrenched slowdown, it said. “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,” it said.

Finance Ministry in a statement sought to counter the lowering of the outlook by Moody’s saying, “India’s relative standing remains unaffected.” It said the government has undertaken a series of financial sector and other reforms to strengthen the economy as a whole. “The Government of India 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,” it said. “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 statement added.

Moody’s said it doesn’t expect the credit crunch among non-bank financial institutions, which were the main source of consumer loans in recent years, to be resolved quickly. It said the negative outlook indicates that an upgrade was unlikely in the near term. “Moody’s would likely change the rating outlook to stable if the likelihood that fiscal metrics would stabilise and improve over time…” The rating agency said although the measures announced recently including policy rate cuts by the RBI, which would provide support to the economy, they were unlikely to restore productivity and real GDP growth to previous rates.

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