New Delhi: India's weak household consumption will curb economic revival which in turn will reduce the debt servicing capability of households, Moody's Investors Service said on Monday.

India's growth has decelerated to a six and half year low at 4.5% in September quarter from 5.0% in the preceeding quarter. Moody's has lowered its GDP growth projection for India for the fiscal year ending March 2020 to 4.9% from 5.8%. The rating agency recently revised it's sovereign rating outlook to negative from stable.

"What was once an investment-led slowdown has now broadened into weakening consumption, driven by financial stress among rural households on the back of stagnating agricultural wage growth and constrained productivity, as well as weak job creation due to rigid land and labor laws," says Deborah Tan, a Moody's Assistant Vice President and Analyst.

The credit crunch among non-bank financial institutions (NBFIs), which have been major providers of retail loans in recent years, has exacerbated this slowdown.

"While the income shock to households has been unfolding over several years, it was not visible on headline growth as long as households could borrow from NBFIs. With the materialization of a credit supply shock, we now see the impact of these twin shocks on growth," adds Tan.

The rating agency said the slower economic growth over the last few quarters will also reduce the debt servicing capabilities of households, which in turn will weaken the asset quality of retail loans across all segments. "Private-sector banks have a larger exposure to retail loans and may be more at risk. However, an increase in non-performing loans (NPLs) should be gradual," it added.

Moody's expects that government measures to stimulate domestic demand including income support for farmers and low-income households, monetary policy easing and a broad corporate tax cut to be limited in offsetting this slowdown.

Although a modest recovery is expected for next year, supported partly by spillovers from policy stimulus, economic growth will be weaker than in recent years, which will have negative credit implications for Indian issuers in a range of sectors, it added.

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