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Moody's Investors Service has downgraded its outlook on India's ratings to "negative" from "stable", on increasing risks of lower economic growth than the past and reflecting lower government effectiveness at addressing long-standing economic and institutional weaknesses.
"While government measures to support the economy should help to reduce the depth and duration of India's growth slowdown, 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 slowdown. 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. 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," Moody's says in a release.
Moody's Investors Service has changed the outlook on its India ratings to negative from stable while keeping the foreign-currency and local-currency long-term issuer ratings unchanged at Baa2. It says, "The Baa2 rating balances the country's credit strengths including its large and diverse economy and stable domestic financing base for government debt, against its principal challenges including high government debt, weak social and physical infrastructure and a fragile financial sector. India's long-term foreign-currency bond and bank deposit ceilings remain unchanged at Baa1 and Baa2, respectively."
The government responded to the downgrading saying India continues to be among the fastest growing major economies in the world, India's relative standing remains unaffected.
"India continues to be among the fastest growing major economies in the world, India's relative standing remains unaffected. IMF in their latest World Economic Outlook has stated that Indian Economy is set to grow at 6.1% in 2019, picking up to 7 % in 2020. As India's potential growth rate remains unchanged, assessment by IMF and other multilateral organizations continue to underline a positive outlook on India," the government says in a release.
According to the ratings agency, the outlook on India partly reflects government and policy ineffectiveness in addressing economic weakness, which led to an increase in debt burden from already high levels.
At a six year low, India's economy grew only 5% year-on-year between April and June, its weakest pace since 2013, as consumer demand and government spending slowed amid global trade frictions.
The international ratings agency said it estimates that the country's growth slowdown is in part long-lasting while backing its other ratings for India.
In recent months the Indian government has responded to the growth slowdown with a series of measures aimed at stimulating domestic demand. These include income support to farmers and low-income households, help for stressed industries including autos and NBFIs, and a broad corporate tax cut that reduced the base rate to 22% from 30%. Meanwhile, the Reserve Bank of India (RBI) has repeatedly cut the policy rate, by a cumulative 135 basis points since February 2019.
Although Moody's says it expects these measures to provide support to the economy, they are unlikely to restore productivity and real GDP growth to previous rates. "Moreover, the multiple facets of the slowdown and structural weaknesses in the real economy and financial system that it reflects point to further downside risks to our expectations that real and nominal GDP growth will rise towards 6.6% and 11%, respectively over the next year. In turn, 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.
According to the Indian government release, IMF in their latest World Economic Outlook has stated that Indian Economy is set to grow at 6.1% in 2019, picking up to 7% in 2020.
As India's potential growth rate remains unchanged, assessment by IMF and other multilateral organizations continue to underline a positive outlook on India, the Finance Ministry said.
The Government has undertaken a 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, it said, adding, 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.