Moody’s Investors Service, the investor-focussed arm of ratings agency Moody’s, has downgraded its outlook on India to ‘negative’ from ‘stable’.
The agency, however, has retained India’s credit rating at Baa2.
“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,” Moody’s Investors Service said in a statement.
The agency further said that while government measures to support the economy should help reduce the depth and duration of India’s growth slowdown, prolonged financial stress among rural households, weak job creation and a credit crunch among non-bank financial institutions (NBFIs) have increased the probability of a more entrenched slowdown.
“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 added. “If nominal GDP growth does not return to high rates, Moody’s expects that the government will face very significant constraints in narrowing the general government budget deficit and preventing a rise in the debt burden.”
Government reacts
The government responded swiftly to the announcement, defending the economy on the basis of its status as one of the fastest-growing major economies in the world, a fact reaffirmed by the International Monetary Fund (IMF).
“Government of India has noted that the Moody’s Investors Service has today changed the outlook on the Government of India’s ratings to negative from stable while keeping the foreign-currency and local-currency long-term issuer ratings unchanged at Baa2,” the government said in a statement.
“However, India continues to be among the fastest growing major economies in the world, India’s relative standing remains unaffected,” it added. “IMF in their latest World Economic Outlook has stated that Indian economy is set to grow at 6.1% in 2019, picking up to 7 % in 2020. As India’s potential growth rate remains unchanged, assessment by IMF and other multilateral organizations continue to underline a positive outlook on India.”
The government added that the fundamentals of the economy remained robust, with inflation under check and bond yields low and that India continued to offer strong prospects of growth in the near and medium term.
Moody’s Investors Service, for its part, said that it would likely change the rating outlook to stable “if the likelihood that fiscal metrics would stabilise and improve over time increased significantly”.
