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The nationwide lockdown has led to massive loss of output.
The nationwide lockdown has led to massive loss of output.

Moody’s sees nil growth in FY21, cuts growth projection to zero

India’s nationwide lockdown, considered the severest in the world, has led to massive retrenchment and loss of output

Moody’s Investors Service on Friday cautioned that the country’s sovereign rating could be downgraded if its fiscal metrics weaken materially, following a similar warning from Fitch Ratings. Moody’s also slashed its growth projection for India to 0% for FY21.

“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.

Last November, Moody’s 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 S&P Global Ratings and Fitch, which have assigned the lowest investment grade to India with a stable outlook.

India’s nationwide lockdown, considered the severest in the world, has led to massive retrenchment and loss of output. Unemployment rate climbed to a staggering 27.1% in the week to 3 May, while around 121.5 million reported job losses in April, data from the Centre for Monitoring Indian Economy showed. The government is contemplating the size and nature of a stimulus package, including the source of financing.

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 N.K. 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 on Linkedin.

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.

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 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," it said in a note.

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