Thu. Mar 28th, 2024
Moody's GDP Growth estimate

On Friday, Moody’s Investors Service, issued a report with the performance of Indian economy in FY21, so far. In the report, it cautioned that the country’s sovereign rating could be downgraded if its fiscal metrics weaken materially. This advisory follows the one made by Fitch Ratings. Moody also cut down on its previous growth prediction for India in the current fiscal year of 2020-21.

In this credit opinion report, the agency explained, “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.”

Last November, Moody’s had revised its prospect for India’s sovereign rating from stable to negative. Moody’s credit rating of Baa2, the second-lowest investment grade score, is still better than those of S&P Global Ratings and Fitch. They have assigned the lowest investment grade to India with a stable outlook.

The nationwide lockdown that was announced by the Indian Government on March 25th, has been globally considered to be the strictest amongst all the countries grappling with the coronavirus pandemic. This lockdown effectuated a ban in all”non-essential” economic activities which led to massive retrenchment and loss of output. Unemployment rate climbed to a staggering 27.1% in the week that ended in 3 May. Additionally, around 121.5 million people have reported being fired in the month of April, according to data from the Centre for Monitoring Indian Economy. Now, sources are saying that the government has been seriously considering rolling out more relief stimuli alongside how to finance them and targeting its delivery to the ones in need.

Therefore, on Thursday, former Reserve Bank of India governor Raghuram Rajan talked about advocating monetization of government deficit with prior deliberation. He said that if the fiscal deficit and the growth in government debt are deemed unsustainable, investors and rating agencies will naturally get panicky.

“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 a post, in Linkedin.

In the report, Moody’s further mentioned that a marked and long-lasting weakening in the health of the financial sector would firstly raise associated fiscal costs should the government need to support some financial institutions. Secondly, it would also increase the risk of the growth, staying too low, to prevent a rise in the country’s debt burden.

Moody’s acknowledged that 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.

Just last month, Fitch Rating has issued a report which cautioned 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 the accompanying note.

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