Global credit rating agency Moody’s Investors Service on Monday downgraded India’s sovereign rating to “Baa3’’ from “Baa2’’, saying the country faces a prolonged period of slower growth relative to the country’s potential amid rising debt and persistent stress in parts of the financial system.
“Baa3’’ is the lowest investment grade – one level above the junk status. The outlook remains negative, the agency’s statement read.
Moody’s said its decision to downgrade India’s ratings reflects its 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”.
While the downgrade was done in context of the coronavirus pandemic, it was not driven by the impact of the pandemic, the agency added. “Rather, the pandemic amplifies vulnerabilities in India’s credit profile that were present and building prior to the shock, and which motivated the assignment of a negative outlook last year,” the statement said.
Slow reform momentum and constrained policy effectiveness have contributed to a prolonged period of slumped growth in India that started before the pandemic is expected to “continue well beyond it”, it said.
The rating agency said that it expected India’s real Gross Domestic Product to contract by 4.0% in the fiscal year of 2020 because of the “shock from the coronavirus pandemic” and the resulting lockdown measures to contain it. It predicted a growth of 8.7% in the fiscal year of 2021 and closer to 6% thereafter.
“Thereafter and over the longer term, growth rates are likely to be materially lower than in the past, due to persistent weak private sector investment, tepid job creation and an impaired financial system,” it added. “In turn, a prolonged period of slower growth may dampen the pace of improvements in living standards that would help support sustained higher investment growth and consumption.”
India’s credit crunch in the “undercapitalised” financial sector is unlikely to be resolved quickly, Moody’s said. This is because of the “persistent stress among banks and non-bank financial institutions weighs on growth dynamics through constrained supply of credit for consumption and investment”.
The Centre had responded to the growth slowdown before the pandemic broke out with a series of measures aimed at stimulating domestic demand, the agency said. It recently also announced a Rs 20 lakh crore economic package to support India’s most vulnerable households and small businesses. But, the agency does not expect that these measures will durably restore real GDP growth to rates around 8%, “which had seemed within reach just a few years ago,” it said.
The agency also pointed out the challenges in the implementation of schemes, as seen with previous reforms, because of which the benefits to medium-term growth “will likely be less than intended”.
The nationwide lockdown to limit the spread of the coronavirus, imposed on March 25, has severely hit India’s economy. India’s Gross Domestic Product growth rate stood at 3.1% for the fourth quarter of 2019-’20, according to data the government released on Friday. In the October to December 2019 quarter, the country’s economic growth stood at 4.7% – a seven-year low. However, the final figures released for the third quarter on Friday showed that India’s GDP grew at 4.1% during October to December last year.