Modi-impact: Moody's downgrades India's rating to negative

Published: November 8, 2019
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PHOTO: REUTERS

PHOTO: REUTERS

NEW DELHI: Moody’s Investors Service on Thursday cut India’s ratings outlook to “negative” from “stable”, citing increasing risks that growth in Asia’s third-largest economy will remain lower than in the past.

The ratings agency said its action partly reflected government and policy ineffectiveness in addressing economic weakness, which in turn led to an increase in debt burden from already high levels.

Moody’s retained its foreign and local currency ratings at ‘Baa2’.

The Nifty 50 index fell 0.4% in early trade on Friday, while the rupee weakened to 71.31 against the dollar, versus Thursday’s close of 70.965.

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“India continues to be among the fastest-growing major economies in the world, India’s relative standing remains unaffected,” the finance ministry said in a response to the outlook cut, adding that the economy’s fundamentals remained “quite robust”.

A man looks at a screen displaying the Sensex on the facade of the Bombay Stock Exchange (BSE) building during the presentation of the budget, in Mumbai, India, July 5, 2019. REUTERS/Francis Mascarenhas/Files

A man looks at a screen displaying the Sensex on the facade of the Bombay Stock Exchange (BSE) building during the presentation of the budget, in Mumbai, India, July 5, 2019. PHOTO: REUTERS

The economy grew only 5.0% year-on-year between April and June, its weakest pace since 2013, as consumer demand and government spending slowed amid global trade frictions.

This prompted a slew of rate cuts by the central bank, while the government rolled out several measures, including a sharp cut in corporate taxes, in a bid to boost growth.

“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 have increased the probability of a more entrenched slowdown,” Moody’s said.

Indian Premier Narendra Modi. PHOTO: REUTERS/File

Indian Premier Narendra Modi. PHOTO: REUTERS

Moody’s said it does not expect the credit crunch among non-bank financial institutions to be resolved quickly.

The domestic auto sector is also in the middle of one of its worst slowdowns ever, and overall jobless rates rose to 8.5% in October, the highest since August 2016.

Growth in fuel demand is on course to fall to its lowest in at least six years as the economy slows and after heavy rains impacted gasoil consumption, which accounts for about two-fifth of the nation’s overall fuel use.

After the corporate tax cuts and lower nominal GDP growth, Moody’s now expects a government deficit of 3.7% of GDP in the fiscal year ending in March 2020, compared with a government target of 3.3% of GDP.

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