Moody’s Investors Service downgraded India’s rating outlook to ‘negative’ from ‘stable’, citing rising risks that economic growth would be materially lower than in the past as the government struggles to rein in the fiscal deficit.
The country’s sovereign ratings were affirmed at ‘Baa2’, the second lowest investment grade.
There is “rising risk of an entrenched growth slowdown as medium-term reform prospects have dimmed and stress in the financial sector has increased,” the agency said. Stress among non-banking financial institutions adds to the downside risks to the medium-term growth outlook.
Further, the rating agency said it does not expect the credit crunch among non-bank financial institutions to be resolved quickly.
Moody’s observed that policies to address long-standing economic and institutional weaknesses were less effective than the agency previously estimated, leading to a gradual increase in debt burden.
If nominal growth fails to return to high rates, then the government will face significant constraints in narrowing the general government budget deficit and preventing a rise in the debt burden.
A prolonged period of slower growth would dampen income growth and the pace of improvements in living standards.
India’s economy expanded only 5 percent in the June quarter, the slowest in six years. The probability to sustain at or above 8 percent growth has diminished, Moody’s said.
Shilan Shah, an economist at Capital Economics, said a more realistic target would be sustained GDP growth of around 6-7 percent over the coming years.
The rating agency forecast budget deficit of 3.7 percent of GDP in the fiscal year ending March 2020, suggesting a slippage from its target despite one-off revenue from the special central bank dividend payment. India’s debt burden is forecast to remain around 68 percent of GDP
In response to the downgrade, India’s finance ministry said the government has undertaken a series of financial sector and other reforms to strengthen the economy. The government 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, the ministry said.