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Moody's says India's negative rating outlook reflects rising risk of slower GDP growth

Date: 08-05-2020
Subject: Moody's says India's negative rating outlook reflects rising risk of slower GDP growth
Moody's Investors Service on Friday said the negative outlook on India's rating reflects increasing risks that GDP growth will remain significantly lower than in the past and partly hints at weaker policy effectiveness to address economic and institutional issues.

Moody's had, in November 2019, downgraded India's outlook to negative from stable on concerns of lower economic growth. The agency had, however, affirmed country's 'Baa2' rating.

In its update to the November forecast released on Friday said, "India's credit profile is supported by its large and diverse economy, and stable domestic financing base. This is balanced against high government debt, weak social and physical infrastructure, and a fragile financial sector, which face further pressures amid the coronavirus outbreak."

It added that the "shock" will exacerbate an already material slowdown in economic growth, which has significantly reduced prospects for durable fiscal consolidation.

It further added that India's credit strengths are its large and diversified economy, potential from demographics and productivity catch-up to sustain high growth, and its large and stable domestic financing base for government debt. As credit challenges it listed the high general government debt and wide fiscal deficit, weak physical and social infrastructure, and fragile financial sector.

Rating outlook

Moodys said the negative outlook reflects increasing risks that economic growth will remain significantly lower than in the past.

“This is in light of the deep shock triggered by the coronavirus outbreak, and partly reflects lower government and policy effectiveness at addressing long standing economic and institutional weaknesses, leading to a gradual rise in the debt burden from already high levels,” it added.

It added that government measures to support the economy should help to reduce the depth and duration of India's growth slowdown. However, 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 weakening.

“Moreover, prospects of further reforms that would support business investment and growth at high levels, and significantly broaden the narrow tax base have diminished. If nominal GDP growth does not return to high rates, we expect that the government will face very significant constraints in narrowing the general government budget deficit and preventing a rise in the debt burden,” it noted.

It however also noted that the negative outlook also indicates that an upgrade is “unlikely is unlikely in the near term”.

“We would be likely to change the rating outlook to stable if we saw a significant increase in the probability of fiscal metrics stabilizing and strengthening over time. 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 stabilization of the non-bank sectors would be credit positive,” it added.

Last month, Moody's had slashed India's growth forecast for calendar year 2020 to 0.2 per cent from 2.5 per cent projected in March.

Moody's said fiscal deficit this year is set to widen materially due to sharp decline in growth and stimulus spending, and weaker government revenue.

Source:- moneycontrol.com

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