Published 22:03 IST, June 1st 2020
Moody's demote India's rating by a notch with negative outlook
American rating agency Moody's on Monday downgraded India's sovereign rating to Baa3 from Baa2 and maintained its negative outlook due to coronavirus pandemic
American rating agency Moody's on Monday downgraded India's sovereign rating to Baa3 from Baa2 and maintained its negative outlook as the coronavirus pandemic and the subsequent lockdown halted economic activities and sucked out demand. The company sighted low growth, deterioration in the government's fiscal position, and stress in the financial sector as the reason for its actions. It had upgraded India's ratings to Baa2 in November 2017.
A sovereign credit rating is an independent assessment of the creditworthiness of a country or sovereign entity. Sovereign credit ratings can give investors insights into the level of risk associated with investing in the debt (government bonds) of a particular country, including any political risk.
In a statement, the agency said, "The decision to downgrade India's ratings reflects Moody's view that the country's policymaking institutions will be challenged in enacting and implementing policies which effectively mitigate the risks of a sustained period of relatively low growth, significant further deterioration in the general government fiscal position and stress in the financial sector."
The agency now expects India's real GDP to contract by 4.0% in fiscal 2020 due to the shock from the coronavirus pandemic and related lockdown measures, followed by a jump of 8.7% in fiscal 2021 and closer to 6.0% thereafter.
Prolonged erosion in fiscal strength
Moody's further said the negative outlook reflects "dominant, mutually-reinforcing, downside risks" from deeper stresses in the economy and financial system that could lead to "a more severe and prolonged erosion" in fiscal strength than the agency currently projects.
"India faces a prolonged period of slower growth relative to the country's potential, rising debt, further weakening of debt affordability and persistent stress in parts of the financial system, all of which the country's policymaking institutions will be challenged to mitigate and contain," the statement reads.
Reform push weak, stimulus won't help
Moody's noted that effective implementation of key reforms "has been relatively weak" and the coronavirus pandemic "amplifies vulnerabilities in India's credit profile" that were present and building prior to the shock. The company had already issued a negative outlook for India in November last year.
On the multi-lakh crore economic package announced by the Modi government in May, Moody's said it does not expect that those measures will "durably restore real GDP growth to rates around 8%" which was earlier deemed reachable.
"While achieving the objectives laid out in these announcements would be credit positive, challenges with implementation of previous reforms suggest that the benefits to medium-term growth will likely be less than intended," the statement says.
Govt debt to rise
On the fiscal front, Moody's noted that lower real and nominal GDP growth over the medium term will diminish the government's ability to reduce its debt burden while its mixed track record on implementation of revenue-raising measures lowers the prospects of fiscal policy-driven budget consolidation. The agency expects the coronavirus shock to cause the debt burden (combined central and state governments) to rise to about 84% of GDP in fiscal 2020.
"Overall, with very limited room for outright fiscal consolidation, the outlook for India's debt burden will depend on trends in nominal GDP growth and is unlikely to decline unless growth accelerates markedly and sustainably above 10%," Moody's said.
Updated 22:03 IST, June 1st 2020