Cites 'receding downside risk' to the financial system
Appreciating that banks and NBFCs now pose a lesser downside risk to the real economy thanks to the steps taken by the government and the banking regulator to repair their impaired balance sheets, Moody’s Investors Service on Tuesday affirmed India’s sovereign rating at Baa3, the lowest investment grade, while upgrading the country’s outlook to ‘stable’ from ‘negative’.
Moody’s had, in June 2020, trimmed India’s rating by a notch to the lowest investment grade, which is just a notch above junk status, and retained the ‘negative’ outlook, citing weakening fiscal metrics in the wake of the Covid-19 outbreak.
Stating that an economic recovery was underway with activity picking up and broadening across sectors, the agency has now said India’s real GDP would rebound to a growth rate of 9.3% in the current fiscal, followed by 7.9% in 2022-23.
In the wake of the second wave, Moody’s had, in May, slashed its India growth forecast to 9.6% for the calendar year 2021 from 13.9% announced earlier. It projected growth to slow down to 7% in 2022.
Moody’s was the only agency to revise up India’s sovereign rating for the first time in over a decade in November 2017, while its peers –S&P and Fitch — haven’t yet given the country an upgrade. Later, in November 2019, it revised down its outlook for India to ‘negative’.
In a meeting with Moody’s officials on September 28, the finance ministry had sought an upgrade in India’s sovereign rating, citing strong macro economic fundamentals and improvements in fiscal health reflected in buoyancy in tax revenues (net tax revenues rose 127% on year in April-August).
“Risks that a negative feedback loop between the financial sector and real economy set in have receded, resulting in lower susceptibility to event risk,” Moody’s said. “With higher capital cushions and greater liquidity, banks and non-bank financial institutions pose much lesser risk to the sovereign than Moody’s previously anticipated.”
The affirmation of the ratings balances India’s key credit strengths, which include a large and diversified economy with high growth potential, a relatively strong external position, and a stable domestic financing base for government debt, against its principal credit challenges, including low per capita incomes, high general government debt, low debt affordability and more limited government effectiveness, it said.
Downside risks to growth from subsequent coronavirus infection waves are mitigated by rising vaccination rates and more selective use of restrictions on economic activity, as seen during the second wave, it said.
Looking ahead, Moody’s expects real GDP growth to average around 6% over the medium term, reflecting a rebound in activity to levels at potential as conditions normalize. In turn, a return to trend nominal GDP growth of around 10-11% over the next few years will allow for a gradual fiscal consolidation and stabilisation of the government’s debt burden, albeit at high and above pre-pandemic levels.
India’s general government debt burden increased sharply from 74% of GDP in 2019 to an estimated 89% of 2020 GDP, significantly higher than the Baa median of around 48%. “Looking ahead, Moody’s expects the debt burden to stabilise at around 91% over the medium term, as strong nominal GDP growth is balanced by a gradually shrinking, but still sizeable, primary deficit. Combined, a higher debt burden and weaker debt affordability than before the pandemic, which Moody’s expects to persist, contribute to lower fiscal strength,” the agency said.
Moody’s said it could could upgrade the ratings if India’s economic growth potential increased materially beyond its expectations, supported by effective implementation of government economic and financial sector reforms that resulted in a significant and sustained pickup in private sector investment.