Blow to India: Moody's cuts India's credit rating outlook to negative; Govt rebuts

In a blow to India, Moody's Investors Service has cut country's credit rating outlook to negative - the first step towards a downgrade, saying the government has been partly ineffective in addressing economic weakness, leading to rising risks that growth will remain lower.

While foreign currency rating was retained at Baa2 - the second-lowest investment grade score, Moody's projected fiscal deficit of 3.7 per cent of gross domestic product in the year through March 2020, a breach of the government's target of 3.3 per cent, as slower growth and a surprise corporate-tax cut curbs revenue.

In a statement, Moody's said the outlook partly reflects government and policy ineffectiveness in addressing economic weakness, which led to an increase in debt burden which is already at high levels, the rating agency said.

India's economy grew by 5 per cent between April and June, its weakest pace since 2013, as consumer demand and government spending slowed amid global trade frictions.

The government reacted strongly, saying the fundamentals of the economy remain quite robust and series of reforms undertaken recently would stimulate investments.

India's growth outlook has deteriorated sharply this year, with a crunch that started out in the non-banking financial institutions (NBFIs) spreading to retail businesses, car makers, home sales and heavy industries.

"Moody's 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," the rating agency said.

While government measures to support the economy should help to reduce the depth and duration of India's growth slowdown, prolonged financial stress among rural households, weak job creation, and, more recently, a credit crunch among NBFIs, have increased the probability of a more entrenched slowdown, it said.

"Moreover, the prospects of further reforms that would support business investment and growth at high levels, and significantly broaden the narrow tax base, have diminished," it said.

"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," it added.

Fitch Ratings and S&P Global Ratings -- the other two international rating agencies -- still hold India's outlook at stable.

Finance Ministry in a statement sought to counter the lowering of the outlook by Moody's saying, "India's relative standing remains unaffected."
It said the negative outlook indicates that an upgrade is unlikely in the near term. "Moody's would likely change the rating outlook to stable if the likelihood that fiscal metrics would stabilise and improve over time..."