Topics Covered: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.
Why Moody’s downgraded India’s rating?
What to study?
For Prelims: What is Moody’s ratings? Implications of negative outlook?
For Mains: Concerns and ways to address them.
Context: Moody’s Investors Service (“Moody’s”) has downgraded the Government of India’s foreign-currency and local-currency long-term issuer ratings to “Baa3” from “Baa2”. It stated that the outlook remained “negative”.
The latest downgrade reduces India to the lowest investment grade of ratings and brings Moody’s ratings for the country in line with the other two main rating agencies in the world — Standard & Poor’s (S&P) and Fitch.
A rating downgrade means that bonds issued by the Indian governments are now “riskier” than before, because weaker economic growth and worsening fiscal health undermine a government’s ability to pay back.
When India’s sovereign rating is downgraded, it becomes costlier for the Indian government as well as all Indian companies to raise funds because now the world sees such debt as a riskier proposition.
There are four main reasons why Moody’s has taken the decision:
- Weak implementation of economic reforms since 2017.
- Relatively low economic growth over a sustained period.
- A significant deterioration in the fiscal position of governments (central and state).
- And the rising stress in India’s financial sector.
What does “negative” outlook mean?
“The negative outlook reflects dominant, mutually-reinforcing, downside risks from deeper stresses in the economy and financial system that could lead to a more severe and prolonged erosion in fiscal strength than Moody’s currently projects”.
In particular, Moody’s has highlighted persistent structural challenges to fast economic growth such as “weak infrastructure, rigidities in labor, land and product markets, and rising financial sector risks”.
In other words, a “negative” implies India could be rated down further.
What is Moody’s outlook on economic growth, jobs and per capita income?
Moody’s expects India’s real GDP to contract by 4.0% in the current financial year. Thereafter it expects a sharp recovery in 2021-22. But over the longer term, it states “growth rates are likely to be materially lower than in the past”.
Key observations made by Moody’s:
More than two years ago, in November 2017, Moody’s had upgraded India’s rating to “Baa2” with a “stable” outlook. At that time, it expected that “effective implementation of key reforms would strengthen the sovereign’s credit profile” through a gradual but persistent improvement in economic, institutional and fiscal strength.
But those hopes were belied. Since that upgrade in 2017, implementation of reforms has been “relatively weak and has not resulted in material credit improvements, indicating limited policy effectiveness,” according to Moody’s.
The low effectiveness of policy and the resulting loss of growth momentum is evidenced in:
- The sharp deceleration in India’s GDP growth rates- provisional estimates for 2019-20 were pegged at 4.2% — the lowest annual growth in a decade.
- Worsening government (both Centre and state-level) finances.
- Each year, the central government has failed to meet its fiscal deficit (essentially the total borrowings from the market) target. This has led to a steady accretion of total government debt.
- Comparison of credit rating scales by various agencies.
- What is GDP?
- What is a negative outlook?
What Moody’s downgrade means for India? How it should tackle the situation?
Sources: the Hindu.