Economic turbulent times are on, Moody’s Investors Services has cautioned that India’s sovereign rating may be downgraded in case its fiscal metrics weaken materially. Currently, the sovereign rating assigned to India by Moody’s is ‘Baa2’ with a negative outlook.
Although the times of financial turbulence is bad, but the rating agency Moody’s is hopeful for a fast comeback. In a report, Moody’s has also projected zero per cent growth for the Indian economy in the financial year 2020-21. In the financial year 2022, however, the GDP is projected to grow at 6.6 per cent, it said.
Noting that an upgrade in the near term is unlikely it said that a downgrade may take place in case of a prolonged slowdown in growth, with limited prospects of the government being able to restore output through economic and institutional reforms.
“A marked and long-lasting weakening in the health of the financial sector would both raise associated fiscal costs should the government need to support some financial institutions, and increase the risk that growth remained too low to prevent a rise in the debt burden,” it said.
Regarding the current rating of aBaa2 negative’ outlook, the report said that it reflects increasing risks that economic growth will remain significantly lower than in the past.
“This is in light of the deep shock triggered by the coronavirus outbreak, and partly reflects lower government and policy effectiveness at addressing long-standing economic and institutional weaknesses, leading to a gradual rise in the debt burden from already high levels,” it said.
It noted that government measures to support the economy should help to reduce the depth and duration of India’s growth slowdown.
However, prolonged financial stress among rural households, weak job creation and, more recently, a credit crunch among non-bank financial institutions (NBFIs) have increased the probability of a more entrenched weakening, said the report.
Moreover, prospects of further reforms that would support business investment and growth at high levels, and significantly broaden the narrow tax base have diminished, Moody’s said.
“If nominal GDP growth does not return to high rates, we expect that the government will face very significant constraints in narrowing the general government budget deficit and preventing a rise in the debt burden.”
It observed that the rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and financial market turmoil are creating a severe and extensive economic and financial shock.
“For India, we expect a sharp slowdown in growth, with real GDP growth averaging 0.2 per cent in the 2020 calendar year, down from our previous forecast of 2.5 per cent,” said the Moody’s report.
Lower growth and government revenue generation, coupled with coronavirus-related fiscal stimulus measures, will lead to higher government debt ratios which we project to rise to rise to around 81 per cent of GDP over the next few years, it said.