Rating agency Moody’s Investor Service Friday cut its outlook on India’s ratings to negative from stable, but affirmed the investment grade Baa2 foreign-currency and local-currency long-term issuer ratings. The agency said prolonged financial stress among rural households, weak job creation, and a credit crunch among non-bank financial institutions (NBFIs), have increased the probability of a more “entrenched slowdown”.
Lower nominal GDP growth would mean India will face significant constraints in lowering its fiscal deficit and debt burden, Moody’s said. The ratings agency also cut its outlook for 21 large companies, including State Bank of India, Indian Oil Corporation Ltd, Infosys Ltd and NTPC Ltd to “negative” from “stable”.
Lowering of the sovereign credit outlook is a potential step towards an investment rating downgrade. India is now just two notches above non-investment grade country ratings on Moody’s scale. While Moody’s has maintained the country ratings and only lowered the outlook, it still poses risks of capital flight unless the government improves its fiscal health materially through aggressive stake sale in state-owned companies.
The ratings agency also said it does not expect the credit crunch among non-bank financial institutions to be resolved quickly.
The negative outlook also indicates that an upgrade is unlikely in the near term. Stock, currency and bond markets fell sharply reacting to lowering of the India outlook. Sensex at the Bombay Stock Exchange fell 330 points or 0.8% to close at 40,323.6, while the rupee lost 31 paise or 0.45% during the day to 71.28 against the US dollar.
Noting concerns raised by the agency, the finance ministry in a statement said India continues to be among the fastest growing major economies in the world, and its relative standing remains unaffected. The government said it has undertaken a series of financial sector and other reforms to strengthen the economy as a whole, and proactively taken steps 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 fundamentals of the economy remain quite robust with inflation under check and bond yields low. India continues to offer strong prospects of growth in near and medium term,” the finance ministry said.
The economy grew 5% in April-June quarter, its weakest since 2013, prompting the government to cut corporate tax rate to 22% from 30% (excluding surcharge and cess), and a number of other growth promoting measures. Moody’s said while measures announced by the government will provide support to the economy, they are unlikely to restore productivity and real GDP growth to previous rates.
“India’s economic growth has slowed materially, with real and nominal GDP growth falling to 5% and 8% year on year in April-June 2019, respectively. Moody’s estimates that the growth slowdown is in part long-lasting. Moreover, compared with two years ago when Moody’s upgraded India’s rating to Baa2 from Baa3, the probability of sustained real GDP growth at or above 8% has significantly diminished,” it said, adding that the prospects for economic and institutional growth promoting reforms have dimmed.
Over the last seven months, the Reserve Bank of India has also downgraded the GDP growth projection for the current financial year from 7.4% (in February 2019 policy statement) to 6.1% in its October policy statement. Revising the GDP growth expectation for FY’20 downward by 80 basis points from 6.9% in its August policy to 6.1% in October policy, the RBI in its MPC (Monetary Policy Committee) statement said while various high frequency indicators suggested that domestic demand conditions remained weak, there were indications of muted expansion in Q3.
Separately, Nomura Global Market Research said in a report Friday that India’s growth will fall to 4.9% in 2019. “With tight domestic credit conditions persisting amid weak global demand, we now expect India’s recovery to be delayed and the pickup to remain below potential. We lower our GDP growth projections to 4.9% y-o-y (from 5.7%) in 2019 and to 6% (from 6.9%) in 2020,” it said in the report.
Slowing growth and tax collections would put strain on the exchequer, making it difficult to reduce the country’s debt burden. Moody’s now expects a fiscal deficit of 3.7% of GDP by March-end 2020, as against a government target of 3.3%.
The rating agency said multiple facets of the slowdown and structural weaknesses in the real economy and financial system point to further downside risks to its expectations that real and nominal GDP growth will rise towards 6.6% and 11%, respectively over the next year.