India gets a reality check with Moody’s downgrade  

Asia’s third-largest economy placed one rung above junk as pre-coronavirus fiscal crisis deepens likelihood of contraction 

by Sumit Sharma
 India gets a reality check with Moody’s downgrade  
Frailties unmasked: The impact of coronavirus has only worsened India’s economic delcine. Photo: NurPhoto

(ATF) Moody’s Investors Service lowered India’s credit rating by one level by Monday on expectation the government’s fiscal position will deteriorate. Moody’s  also cited growing stress in the financial sector and challenges to overcoming risks of low growth for a sustained period of time. The outlook remains negative, it said.  

The move reflects dominant, mutually reinforcing, downside risks from deeper stresses in the economy and a financial system that could lead to a more severe and prolonged erosion in fiscal strength than Moody's currently projects, it said. India faces a prolonged period of slower growth relative to the country's potential, rising debt and further weakening of debt affordability. 

The relegation puts India on Moody’s lowest investment grade. The country remains on investment grades along Standard & Poor’s and Fitch Ratings. 

India reported a sharp decline in its growth for the year ended March to 4.2%, compared with 6.1 % a year ago. During the January-March quarter, Asia’s third-biggest economy reported 3.1% growth, compared with 4.1% in the December-ended quarter. For the current year, leading brokerages and economists predict contraction of the economy of between 5% and 11.5%. 

``Persistent growth challenges, including weak infrastructure, rigidities in labour, land and product markets, and rising financial sector risks continue to constrain the economy's potential,’’ the credit assessor said. ``These structural weaknesses may impair the economy's recovery from domestic or external shocks, like the current one, to a greater extent than Moody's currently assumes.’’

India has been under a country-wide lockdown since March 25 to contain the spread of the coronavirus pandemic. That’s expected to severely hamper economic growth. Yet Moody’s clarified that Monday’s action was not driven by the impact of the virus. Real GDP growth fell from a high of 8.3% in the year ended March 2017 to 4.2% in the year ended March 2020. 

``The FY20 GDP growth slowed substantially to 4.2% – reaffirming the theme of plummeting investment and weakening consumption, partly countered by government spending,’’ said Madhavi Arora, economist at Edelweiss Securities in Mumbai. ``The Covid-19 shock has clearly derailed the growth path cyclically further, with 1QFY21 GDP looking to contract more than 25%.’

``We now see FY21 growth at -4.0% with a downward bias from 0% earlier,’’ Arora said. ``While 2HFY21 will see significant pick up, sustaining the sequential growth momentum beyond FY21 will require continued innovative policy support and improvement in global backdrop.’’

Moody’s added: "The pandemic amplifies vulnerabilities in India's credit profile that were present and building prior to the shock, and which motivated the assignment of a negative outlook last year. Slow reform momentum and constrained policy effectiveness have contributed to a prolonged period of slow growth,’ Moody’s said. 

Painting a negative longer-term outlook on the Indian economy, Moody’s said growth rates will be lower than in the past because of persistent weak private-sector investment, tepid job creation, and an impaired financial system. Slower growth in turn would dampen the pace of improvement in living standards that would support higher investment growth and consumption. 

A 20 trillion rupees ($264 billion) stimulus package on May 12 is unlikely to restore the economy to the 8% growth path, which in the past seemed within its reach. 

Lower GDP will also diminish India’s ability to reduce its debt burden. Interest payments comprised about 23% of general government revenue, the highest interest burden among Baa-rated peers and around three times the Baa median, Moody’s pointed out.

Fitch and S&P earlier this year cautioned India about likely fiscal slippages and lack of fiscal space. 

``India's fiscal position remains precarious, with elevated fiscal deficits and net government indebtedness,’’ S&P said in its February 13 report. ``Fiscal deficits have exceeded the government's plan, and we expect limited consolidation over the next few years.’’ 

 Both the reports came before the Coronavirus was declared a pandemic on March 11.