Downgrading of India’s economic outlook by Moody’s – Implications

Global credit rating agency Moody’s has announced downgrading of India’s economic outlook to “negative” from stable while reaffirming the Baa2 foreign-currency and local-currency long-term issuer ratings. Moody’s also affirmed India’s Baa2 local-currency senior unsecured rating and its P-2 other short-term local-currency rating.

In an official release, the agency stated that the downgrading of the outlook was done mainly because it felt indications are strong of economic growth remaining lower than what it had previously estimated for the economy.

Is the downgrading justified: at this point of time, downgrading of the outlook does appear a trifle harsh. The current gloomy conditions surrounding the economy have been around for some time now and not a sudden development. Moreover, the government has initiated a slew of measures to tackle the growing slowdown. It is expected that the multiple measures will take some time to take effect. However, international credit rating agencies do have their own methodologies which includes a fair bit of subjectivity as well. One of the concerns pointed out by Moody’s is the risk of growing debt burden. In light of the recent corporate tax cut announced by the finance ministry to drive private initiative, there’s always a risk of revenue targets set by union budget 2019 not being met. Certainly it’ll be a real tightrope walk for the government in the near future.

What are the implications: it is to be noted that while the outlook has been downgraded, the rating band has not been touched. However, it is also true that lowering of outlook is usually the first step towards lowering of investment rating. If the latter happens, then it can have a detrimental effect on foreign funds inflow into the economy. On the other hand, effective handling of fiscal deficit can lead to the outlook being upgraded. Therefore both Central and state governments need a very tight fiscal management in the coming months to make the latter happen.

One of the key concerns in recent times has been the slowdown of demand, especially in rural India. With an erratic monsoon that has had bad effect on kharif crops, stress on the rural economy is likely to grow and this is the biggest challenge for the government to be addressed. Boosting of consumer demand will need sustained government spending – some has already been initiated like allocation of a special Rs 10000 crore fund for stalled housing projects. Yet additional spending allied with reduced corporate tax and the need to maintain fiscal austerity will require a tremendous balance to be maintained.

To conclude: Moody’s outlook lowering comes days after rival rating agency S&P’s warning that “risks of contagion are growing in the Indian economy” and follows RBI cutting the GDP growth forecast for FY2020 from 6.9% to 6.1%. While lowering of outlook doesn’t mean all’s lost, it certainly is a clear pointer that things are grim right now for the economy and head-on strategical countermeasures are the only thing that can help the Indian economy come out of the same.

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