Sovereign rating: Moody’s warn of India downgrade, pegs FY21 growth at 0%

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Published: May 9, 2020 3:50 AM

Separately, in a report released on Friday, S&P said it expected the banking systems of Indonesia and India to be among the worst hit in the Asia-Pacific region.

Moody’s warning follows a similar statement by Fitch and is expected to add to policy-makers’ unease, as they firm up a relief package to prop up the economy.Moody’s warning follows a similar statement by Fitch and is expected to add to policy-makers’ unease, as they firm up a relief package to prop up the economy.

Moody’s Investors Service on Friday trimmed its FY21 growth projection sharply to 0% for India in the wake of the Covid-19 outbreak and warned of a possible rating downgrade for the country if fiscal metrics “weaken materially”.

The global rating agency had in November 2019 revised down its outlook for India from stable to negative, although its sovereign rating of Baa2 is still a notch above those of S&P and Fitch, as these agencies have assigned the lowest investment grade to India, with a stable outlook.

In its latest credit opinion, Moody’s said: “This would probably happen in the context of a prolonged or deep slowdown in growth, with only limited prospects that the government would be able to restore stronger output through economic and institutional reforms.”

Moody’s warning follows a similar statement by Fitch and is expected to add to policy-makers’ unease, as they firm up a relief package to prop up the economy.

Already, several analysts have warned of a negative growth for the entire fiscal, amid a nation-wide lockdown. Manufacturing and services activities have witnessed unprecedented contraction in April, as per the PMI survey. Unemployment rate surged to as much as 27.1% in the week through May 3, according to the Centre for Monitoring of Indian Economy. Moody’s, however, expects GDP growth to recover to 6.6% in FY22.

Government finances in India are stressed, amid a big decline in revenue growth and rising expenditure obligations. Tax revenues of most state governments were less than a fourth of the estimated level in April. While the Centre’s tax revenue in FY21 is estimated by various agencies and experts to be Rs 3-5 lakh crore below the budgeted level, the Centre is trying to soften the blow to its finances by being wary of loosening its purse strings. Also, it is apparently attempting to shift the extra fiscal burden arising out of the Covid-19 pandemic to states and central public sector undertakings.

While an additional fiscal burden of some Rs 75,000 crore has been committed by the Centre already, the expenditure curbs on various departments in June quarter would more than offset this outgo. Of course, more fiscal packages are likely to be announced by the Centre over the course of the pandemic and its immediate aftermath, although there is no clarity as yet on the size of such stimulus.

Chief economic adviser Krishnamurthy Subramanian has recently indicated that borrowing of around $60 billion to fund the rising fiscal deficit could theoretically be through listing government bonds on the global bond indices. “About $4 trillion of money tracks these (global) bond indices. India is expected to get a weight of around 1.5-3%. Even if you take 1.5%, that translates into $60 billion,” he said.

Moody’s said a marked and long-lasting weakening in the health of the financial sector of India would both “raise associated fiscal costs should the government need to support some financial institutions, and increase the risk that growth remained too low to prevent a rise in the debt burden”.

Separately, in a report released on Friday, S&P said it expected the banking systems of Indonesia and India to be among the worst hit in the Asia-Pacific region. It said: “India’s complete lockdown, accompanied by forced closures of nonessential businesses and declining demand, are hurting the economy. We expect the sharp decline in India’s GDP growth in the current year to lead to a sharp rise in nonperforming assets.”

Commenting on outlook, Moody’s said on Friday: “The negative outlook reflects increasing risks that economic growth will remain significantly lower than in the past. This is in light of the deep shock triggered by the coronavirus outbreak, and partly reflects lower government and policy effectiveness at addressing longstanding economic and institutional weaknesses, leading to a gradual rise in the debt burden from already high levels.”

The rating agency, however, said India’s credit profile is supported by its large and diverse economy, and stable domestic financing base. “This is balanced against high government debt, weak social and physical infrastructure, and a fragile financial sector, which face further pressures amid the coronavirus outbreak. The shock will exacerbate an already material slowdown in economic growth, which has significantly reduced prospects for durable fiscal consolidation,” it added.

Talking about the debt-to-GDP ratio following massive borrowing to fund productive spending, CEA Subramanian told India Today channel on Thursday that even if the country witnessed 4%-plus real GDP growth for 5-10 years from FY22, the debt levels would still come down. The important point in the debt sustainability issue is that the rate of borrowing will be far lower than our nominal GDP growth rates.

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