Credit rating agency Moody’s Investors Service has revised its outlook on the Indian economy from “stable” to “negative”, citing increased risks that are likely to keep Gross Domestic Product growth slower than in the past, PTI reported on Friday. The announcement came amid a consistent slowdown in growth, which recorded a six-year low of 5% during the first quarter of the 2019-’20 financial year.

“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 agency said in a statement.

The country’s foreign issuer rating was affirmed at Baa2, which is the second-lowest investment grade score. The agency said that the Baa2 rating balanced India’s “credit strengths”, adding that this included its diverse economy and stable domestic financing base for government debt against its main challenges.

In response, the Union Ministry of Finance reiterated that India was among the fastest-growing major economies in the world. “...India’s relative standing remains unaffected,” said the government. “As India’s potential growth rate remains unchanged, assessment by IMF and other multilateral organizations continue to underline a positive outlook on India.”

The ministry pointed out that the government had taken a series of reforms, including in the financial sector, to boost the economy. “Government of India has also proactively taken policy decisions in response to the global slowdown,” the ministry said. “These measures would lead to a positive outlook on India and would attract capital flows and stimulate investments.”

The government claimed “fundamentals of the economy” were “quite robust with inflation under check and bond yields low”. “India continues to offer strong prospects of growth in near and medium term,” it added.

More entrenched slowdown?

Moody’s said the government’s measures should help curb the “depth and duration of India’s growth slowdown”. However, increased financial stress on rural households, weak job creation, and a credit crunch among non-bank financial institutions raised the possibility of a more entrenched slowdown, it said.

The prospect of more reforms that would back business investment and growth at higher levels and broaden the narrow tax base had diminished, the agency added.

“The drivers of the economic deceleration are multiple and mainly domestic,” the agency said. “Moody’s does not expect the credit crunch among NBFIs [non-bank financial institutions], major providers of retail loans in recent years, to be resolved quickly. With public sector banks still dealing with the legacy of non-performing loans accumulated at the beginning of the decade, credit supply is likely to remain impaired for some time, compounding the income shocks.”

In August, Moody’s had downgraded India’s projected Gross Domestic Product growth rate to 6.2% for 2019-’20. Fitch Ratings and S&P Global Ratings – the other two international rating agencies – still hold India’s outlook at stable.

Last month, the International Monetary Fund lowered India’s projected growth in the current financial year to 6.1% but said it would rebound to 7% in the 2020-’21 financial year. On Thursday, the world body’s Deputy Director Anne-Mary Gulde said India had missed its fiscal deficit targets in the last few years, and asked the Narendra Modi government to ensure “credible fiscal consolidation”.

On October 26, during a visit to New Delhi, World Bank Group President David Malpass called for more reforms and innovation to improve India’s growth rate. A week before that, IMF’s Chief Economist Gita Gopinath said the organisation was “less optimistic” about the country’s economy than it was a few months ago.

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