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NEW DELHI: Moody’s Investors Service on Friday revised downward its growth projection for India to 0% for FY21 and cautioned that the country’s sovereign rating could be downgraded if its fiscal metrics weaken materially. This follows similar warning from Fitch Ratings.

“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," the rating agency said in its latest credit opinion.

In November, Moody’s had revised its outlook for India’s sovereign rating from stable to negative. Moody’s credit rating of Baa2, the second-lowest investment grade score, is better than those of other agencies, such as S&P and Fitch, which have assigned the lowest investment grade to India with a stable outlook.

India’s ongoing nationwide lockdown to contain the spread of the coronavirus pandemic, considered the severest in the world, has led to massive retrenchment and loss of output. India’s unemployment rate climbed to a staggering 27.1% in the week to 3 May and some 121.5 million Indians lost jobs in April, data released by the Centre for Monitoring of Indian Economy showed.

The government is currently contemplating the size and nature of a stimulus package for the economy including the source of financing to stem massive job losses and protect vulnerable sections of the society.

Advocating monetization of government deficit in a measured way, former Reserve Bank of India governor Raghuram Rajan on Thursday said if the fiscal deficit and the growth in government debt are deemed unsustainable, investors and rating agencies will take fright.

“This is where we need to put in place measures that ensure we will go back to fiscal health over the medium term – such as the debt target and the fiscal council suggested by the NK Singh Committee. Modern Monetary Theorists are wrong to think that central bank financing of the government can be ignored. The consolidated liabilities of the government and the central bank have to be seen as sustainable, else confidence in both money and government debt will collapse," he wrote in a social networking website.

A marked and long-lasting weakening in the health of the financial sector 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, Moody's said.

S&P in a report released on Friday said in the Asia-Pacific, it expects the banking systems of Indonesia and India to be among the hardest hit. “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," it added.

Moody’s 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.

Fitch Ratings last month warned that deterioration in India’s fiscal outlook as a result of lower growth could put pressure on its sovereign rating.

“Fiscal easing to support growth is likely to be announced, given the extended lockdown. Further deterioration in the fiscal outlook as a result of lower growth or fiscal easing could pressure the sovereign rating in light of the limited fiscal headroom India had when it entered this crisis," the rating agency said in a statement.

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