Analysts dismiss Moody’s downgrade in India outlook

The rating agency changed its outlook for India’s sovereign rating (Baa2) to negative from stable holding that the country’s economic downturn could be structural. However, it kept the foreign-currency and local-currency long-term issuer ratings unchanged at Baa2.

“We do not set much score by Moody’s downgrade of India’s outlook to negative from stable on fiscal and growth risks," BoFA Merrill Lynch Global Research Report stated, adding that it sees the present slowdown as cyclical rather than structural, as opposed as stated by Moody's.

BoFA Merrill Lynch expects a shallow recovery in the Indian economy early 2020, led by recent steps taken by India’s finance ministry and with banking regulator cutting lending rates. In contrast, Moody’s estimated that the growth slowdown is in part long-lasting. While the government has taken slew of measures to boost demand and address the ongoing slowdown, the ratings agency believed that the measures are unlikely to restore productivity and bring the real Gross Domestic Product (GDP) growth to previous rates.

“Moreover, the multiple facets of the slowdown and structural weaknesses in the real economy and financial system that it reflects point to 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," Moody’s had said.

Some experts echoed BoFA Merrill Lynch’s view. N R Bhanumurthy, a professor at National Institute of Public Finance and Policy (NIPFP) said what Moody’s stated as its outlook on slowdown in Indian economy is not restricted to India as global economy is witnessing a slowdown. “In that sense, I don’t see why Moody’s has to single out India in short-term outlook."

India’s economy has decelerated to a six year low at 5% in June quarter, forcing most international and domestic forecasters to cut their GDP projections close to or below 6% for 2019-20. In the last few months, the finance minister Nirmala Sitharaman announced host of measures, including cutting corporate tax rates to spur an investment led growth and other measures to address issues faced by various sectors. However, it has so far desisted to announce any large fiscal stimulus package to boost slowing consumption which is at an 18 quarter low in June. On Wednesday, the Cabinet cleared ₹25,000 crore package to revive the stalled housing projects and the ailing real estate sector.

“Outlook of India is not too great in the short term, but structural measures taken by the government recently should help medium term growth prospects. We need to be careful in taking Moody’s report very seriously," N Bhanumurthy.

“In turn, a prolonged period of slower economic growth would dampen income growth and the pace of improvements in living standards, and potentially constrain the policy options to drive sustained high investment growth over the medium-to long term," Moody’s said.

India’s sovereign rating should have been maintained at the existing level with unchanged outlook, CARE Ratings said.

According to ratings agency CARE Ratings Chief Economist Madan Sabnavis, the decision taken by Moody’s to change the rating outlook of India from stable to negative comes as a surprise as the economy has been progressing fairly well, led by the reforms initiated by the government over the last couple of months.

“The rating agency (Moody’s) has not highlighted the strengths on the external sector given that FDI, FPI, ECBs, currency and Forex reserves have been major strengths of the economy," he said.

Sabnavis further said India has become a better place to do business now, which can be reflected in the latest rankings released by the World Bank. Last month, India climbing 14 rungs in the World Bank’s Ease of Doing Business 2020 survey to stand at 63, among 190 countries.

“Normally international rating agencies do focus on the doing business environment which has been well on target and hence the sudden decision to change the rating is surprising," Sabnavis said.