Moody's cuts India's credit outlook to negative; govt not convinced

Outlook downgrade comes 2 yrs after ratings upgrade. Govt says fundamentals remain strong

On the day marking the third anniversary of demonetisation, global ratings agency Moody’s cut its outlook for India’s credit ratings to “negative” from “stable”, citing the ongoing economic slowdown, financial stress among rural households, weak job creation, and the liquidity crunch in non-banking financial companies.

Moody’s has affirmed India’s Baa2 long-term sovereign rating, the second-lowest investment grade score, but said the negative outlook indicated that an upgrade was unlikely in the near term. 

Just two years ago, in November 2017, it had upgraded India’s ratings a notch to Baa2 from Baa3.

“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 report early on Friday.

“Moreover, the prospects of further reforms that would support business investment and growth at high levels, and significantly broaden the narrow tax base, have diminished,” it said.

Fitch Ratings and S&P Global Ratings — the other two international rating agencies — still hold India’s outlook at stable. The markets, after showing resilience in the early hours of trade, came under heavy selling pressure in the last hour of the session on Friday on the back of the Moody’s report.

It continued after the ratings firm revised the outlook for eight Indian tech and financial sector companies to negative.

The S&P BSE Sensex lost 330 points, or 0.81 per cent, to settle at 40,324. During the day, the index hit a fresh lifetime high of 40,749.33. On the NSE, the Nifty50 slipped below 12,000 to end at 11,908, down 104 points or 0.86 per cent. The index hit a high of 12,034.15 during the day. The rupee fell by 31 paise to hit an over three-week low of 71.28 against the dollar, while the 10-year government bond yield was up 0.78 percentage points at 6.56 per cent. Bond prices vary inversely as the rate of interest.

In a statement, the Union finance ministry responded by saying that the economy’s fundamentals remained quite robust with inflation under check and bond yields low, and India continued to offer strong prospects of growth in near and medium terms. Economic Affairs Secre¬tary Atanu Chakraborty told Business Standard government officials spoke to Moody’s representatives after the outlook cut, and India’s stand was explained.

“If you look at the Inter¬national Monetary Fund’s (IMF’s) projections, they count us among the fastest-growing major economies even after reducing their forecasts. Medium term again we are high. If you ask me, there was no reason for them to do this. We have maintained inflation and budgetary rectitude, and the current account deficit is also under control, and will continue to be,” Chakraborty said.

The secretary said while Ind¬ia’s GDP growth rate was down, and would be down at the end of the year compared to earlier estimates, that in itself wasn’t not eno¬ugh reason for the outlook to be changed. “However, we will continue to engage with them and other ratings agencies in the coming days and months,” he said.

Real GDP growth for the April-June quarter was 5 per cent, the lowest since 2013. Nominal GDP growth came in at 8 per cent, the lowest since the third quarter of 2002-03. Internally, officials expect July-September GDP growth to be below 5 per cent, before an expected recovery in the second half of the year.

A number of agencies including the Reserve Bankof India, IMF, and researchand ratings firms, and even Chief Economic Advisor Krishnamurthy Subra¬manian had cut their growth forecasts for India for 2019-20.

“The IMF in their latest World Economic Outlook has stated that Indian Economy is set to grow at 6.1 per cent in 2019, picking up to 7 per cent in 2020. As India’s potential growth rate remains unch¬anged, assessment by IMF and other multilateral organizations continue to underline a positive outlook on India,” the finance ministry’s official statement said. “The government has undertaken series of financial sector and other reforms to strengthen the economy as a whole. Government of India has also proactively taken policy decisions in response to the global slowdown. These measures would lead to a positive outlook on India and would attract capital flows and stimulate investments,” the statement said, referring to sector-specific measures and the corporate tax cut announcement by Finance Minister Sitharaman over the past few months.

“Although Moody’s expects these measures to provide support to the economy, they are unlikely to restore productivity and real GDP growth to previous rates,” Moody’s report said.

It said that multiple facets of the slowdown and structural wea¬knesses in the real economy and financial system pointed to furth¬er downside risks to Moody’s forecast of 6.6 per cent GDP gro¬w¬th for the current fiscal year. In the report, the agency projected a fiscal deficit of 3.7 per cent of GDP in the current financial year, compared to the budgeted target target of 3.3 per cent “A prolonged period of slower economic growth would dampen income growth and the pace of improvements in living standards, and potentially constrain the policy options to drive sustained high investment growth over the medium to long term,” it added. Moody’s said it didn’t expect the credit crunch among non-bank financial institutions, which were the main source of consumer loans in recent years, to be resolved quickly.

“Moody’s would likely downgrade India’s ratings if its fiscal metrics were increasingly likely to weaken materially. This would probably happen in the context of a prolonged or deep slowdown in growth, with only limited pros¬pects that the government would be able to restore stronger growth through economic and institutional reforms,” the report said.