NEW DELHI: Moody’s Investors Service on Monday downgraded India’s rating to Baa3, one notch to the lowest grade, citing challenges in the implementation of policies, deteriorating fiscal position, and stress in the financial sector, maintaining a negative outlook.
“The decision to downgrade India's ratings reflects Moody's view that the country's policymaking institutions will be challenged in enacting and implementing policies which effectively mitigate the risks of a sustained period of relatively low growth, significant further deterioration in the general government fiscal position and stress in the financial sector,” the rating agency said in its statement.
The agency added that the negative outlook reflects dominant, mutually-reinforcing, downside risks from deeper stresses in the economy and financial system that could lead to a more severe and prolonged erosion in fiscal strength than Moody's currently projects.
“India faces a prolonged period of slower growth relative to the country's potential, rising debt, further weakening of debt affordability and persistent stress in parts of the financial system, all of which the country's policymaking institutions will be challenged to mitigate and contain,” it said, clarifying, that the downgrade was not driven by the impact of the pandemic.
“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,” it said.
While the experts said timing of downgrade is not fair, it was not unexpected. “Ideally one could have waited for another year before taking such a call as the true picture of any economy would emerge only after this black swan event is behind us,” Madan Sabnavis is chief economist at CARE Ratings said.
Moody’s in April had warned that deterioration in India’s fiscal outlook and lower growth could put pressure on its sovereign rating. The agency said, it had upgraded India's ratings to Baa2 in November 2017 expecting effective implementation of key reforms.
“Since then, implementation of these reforms has been relatively weak and has not resulted in material credit improvements, indicating limited policy effectiveness," Moody said.
Rating agency also revised its FY21 GDP estimate for India to 4 per cent contraction against its earlier projection of flat growth, due to persistent weak private sector investment, tepid job creation and an impaired financial system.
And despite the government announcing Rs 20 lakh crore Aatmnirbhar Bharat Package, Moody's said it does not expect that these measures will durably restore real GDP growth to rates around 8 per cent, which had seemed within reach just a few years ago.
Sabnavis adds that as the sovereign does not borrow overseas, this should not make a difference but this will impact Indian companies borrowing from outside.
“Indian companies borrowing from outside will have challenges when factoring in the cost. There is also a possibility of other ratings agencies like S & P and Fitch following suit which has to be observed”.