Moody's Says India Headed for Debt Trap And Recessionary Phase; Cuts Outlook to Negative from Stable

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.

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    India's manufacturing PMI slips to 2-year low in October
    The cooling of manufacturing growth in India continued last month as the headline seasonally adjusted IHS Markit India Manufacturing PMI fell from 51.4 in September to a two-year low of 50.6 in October, research firm IHS Markit said on Friday.
     
    Both factory orders and production rose at the weakest rate for two years. Besides, job creation softened to a six-month low, an IHS Markit statement said.
     
    Challenging market conditions coupled with delayed client payment, dampened business confidence in October. 
     
    The research firm, however, noted that the lower demand for raw materials and semi-finished items led to a fall in overall cost burdens, the first in over four years.
     
    IHS Markit said that companies were reluctant to hold excess stock and lowered input buying as business confidence slipped to its lowest level in over two-and-a-half years.
     
    "In another sign of subdued growth conditions, input costs declined for the first time in over four years," IHS Markit said.
     
    However, "growth was restored in capital goods and softened in the consumer goods category", it added. 
     
    Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
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    COMMENTS

    Ramesh Poapt

    3 weeks ago

    it is usual...no worry..

    Credit squeeze to arrest economic growth to 5.5% in FY20: Fitch
    Global ratings agency Fitch Ratings on Thursday said that it expects India's economic growth to be at 5.5 per cent in 2019-20, due to the large squeeze in credit availability emanating from non-bank financial companies (NBFCs).
     
    Accordingly, the global ratings agency expects economic growth to be 5.5 per cent in 2019-20, before picking up to 6.2 per cent in 2020-21 and 6.7 per cent in 2021-22. 
     
    "Nevertheless, growth is likely to be significantly below its potential over the next year or so," the agency said. 
     
    According to Fitch Ratings, assuming the sluggish pace of lending is maintained throughout the year, total new lending will amount to only 6.6 per cent of GDP in the fiscal year 2019-2020, down from 9.5 per cent in the previous fiscal year. 
     
    However, it noted that recent government measures should gradually improve the flows of credit and nudge up growth. 
     
    "Looser global financial conditions are also supportive, with a noticeable pickup in external commercial borrowings in 2019," the agency said. 
     
    Recent data showed that India's economy had decelerated for the fifth cons ecutive quarter in the 2Q19, with GDP expanding by a meagre 5 per cent yoy, down from 8 per cent recorded a year earlier. 
     
    Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
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