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MUMBAI/NEW DELHI: Global rating agency Moody’s Investors Service ("Moody's") has lowered the outlook on the government of India's ratings to negative from stable and affirmed the Baa2 foreign-currency and local-currency long-term issuer ratings. Moody's also affirmed India's local-currency senior unsecured rating and other short-term local-currency rating.

In response, the government on Friday said the fundamentals of the economy remain quite robust with inflation under check and bond yields low and asserted that India offers strong prospects of growth in the near and medium term.

The statement from the finance ministry came shortly after global ratings agency Moody’s changed India’s outlook.

“The Government has undertaken series of financial sector and other reforms to strengthen the economy as a whole. Government of India 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 finance ministry said.

The government said India continues to be among the fastest growing major economies in the world and the country’s standing remains unaffected. It said that the IMF in their latest World Economic Outlook has stated that Indian Economy is set to grow at 6.1% in 2019, picking up to 7 % in 2020.

“As India’s potential growth rate remains unchanged, assessment by IMF and other multilateral organizations continue to underline a positive outlook on India,” the finance ministry added.

The rating agency said that its decision to change the outlook to negative reflects increasing risks that economic growth will remain ‘materially lower’ than in the past, partly reflecting lower government and policy effectiveness at addressing long-standing economic and institutional weaknesses than Moody's had previously estimated, leading to a gradual rise in the debt burden from already high levels. India’s rating was upgraded to Baa2 from Baa3 in 2017 citing progress on `economic and institutional reforms’ by the Narendra Modi government.

The agency said that given the slowdown there are further downside risks to Moody's expectations that real and nominal GDP growth will rise towards 6.6% and 11% respectively over the next year. To avoid this it has called for reforms to reduce restrictions on the productivity of labor and land, stimulate private sector investment, and sustainably strengthen the financial sector.

While acknowledging government measures to support the economy, which it said will reduce the depth and duration of India's growth slowdown, Moody’s said that prolonged financial stress among rural households, weak job creation, and, more recently, a credit crunch among non-bank financial institutions (NBFIs), have increased the probability of a more entrenched slowdown.

Moody's sees reduced prospects of reforms to support business investments and to broaden the narrow tax base. “If nominal GDP growth does not return to high rates, Moody's expects that the government will face very significant constraints in narrowing the general government budget deficit and preventing a rise in the debt burden,” the statement said.

Local factors

Describing the causes of slowdown as mainly domestic, Moody’s said that given weak investment private consumption has slowed driven by stress in rural households and weak job creation. Also the credit crunch in non-banking finance companies is not expected to resolve soon. Thirdly, public sector banks are yet to get out of their bad loan problem and India’s per-capita income, which is still low at $7,900 is not enough to absorb negative shocks.

Also putting pressure on India’s rating is combined state and central government debt, which at about 67% of GDP is materially larger than the Baa median of around 52%. Meanwhile, interest payments comprise about 23% of general government revenue, the highest interest burden among Baa-rated peers and three times the Baa median of 8%.

Following the recently-announced tax cuts Moody's now expects a central government deficit of 3.7% of GDP in the fiscal year ending in March 2020 (fiscal 2019), marking a 0.4 percentage point slippage from its target despite significant one-off revenue from the special RBI dividend payment.



In Video: Moody's lowers India's outlook from 'stable' to 'negative'