Moody’s Investors Service on Thursday changed its outlook on India to “negative” from “stable” amid concerns that the country’s economic growth will remain "materially lower than in the past". The outlook partly reflects government and policy ineffectiveness in addressing economic weakness, which led to an increase in debt burden from already high levels, the agency said.
Here are the salient points from Moody's report on rating action:
Economic Growth:
Moody's estimates that India's growth slowdown is in part long-lasting. Rather, the downside risks to the growth outlook have increased as prospects for economic and institutional reforms that would lift and maintain growth at high rates have diminished. The drivers of the economic deceleration are multiple and mainly domestic due to a prolonged period of weak investment, slowing private consumption, financial stress among rural households and weak job creation. On top of it, the ongoing stress among non-banking financial institutions (NBFIs), which served as major providers of retail loans in recent years, is less likely to be resolved quickly.
Reforms: The government measures to address the growth slowdown and stimulate demand such as income support to farmers and low-income households, help for stressed sectors and corporate tax cut along with the Reserve Bank of India's cumulative rate cut of 135 basis points since February 2019 is unlikely to restore productivity and real GDP growth to previous rates, according to analysts. Unless reforms are advanced to directly reduce restrictions on the productivity of labour and land, stimulate private sector investment, and sustainably strengthen the financial sector, potential GDP growth and employment generation will remain constrained, says Moody's.
Fiscal Deficit: The outlook is significantly dependent on trends in nominal GDP growth and the scope for the government to narrow the budget deficit will remain very limited. Under nominal GDP growth of around 11 percent, which Moody's broadly projects as its baseline over the next few years, the debt burden will remain around 68 percent of GDP. This would constrain fiscal flexibility.
Other factors: Moody's says India is vulnerable to climate change, particularly monsoon rains, which are critical for the country's agricultural sector that drives half of the overall consumption and rural incomes. Additionally, India's young and growing working-age population presents both an opportunity as well as a challenge.
Rating Revision: Moody's' analysts say an upgrade is unlikely in the near-term unless fiscal metrics stabilise and improve considerably.
First Published: Nov 8, 2019 9:55 AM IST
