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The forecast also partly shows weaker political effectiveness in addressing economic and institutional issues, he noted in his November 2019 rating forecast update.
Claiming that the negative outlook indicates an improvement is unlikely in the short term, Moody’s said that high government debt, weak social and physical infrastructure, and a fragile financial sector face new pressures due to the coronavirus outbreak.
Moody’s had affirmed India’s ‘Baa2’ rating in November 2019, but downgraded the outlook to negative from stable due to concerns about slower economic growth.
‘Baa2’ is an investment grade rating with moderate credit risk, and is two levels above the junk rating.
The negative outlook reflects growing risks that economic growth will continue to be significantly lower than in the past, he said.
“This is in light of the profound shock caused by the coronavirus outbreak, and in part reflects less effective government and policy effectiveness in addressing long-standing economic and institutional weaknesses, leading to a gradual increase in the burden of debt from already high levels, “Moody’s said in a statement. Credit opinion titled ‘Government of India- Baa2 negative’.
He said the impact of the coronavirus pandemic will exacerbate a material slowdown in economic growth, which has significantly reduced the prospects for lasting fiscal consolidation, and government measures to support the economy should help reduce the depth and duration of the slowdown. .
“However, prolonged financial stress among rural households, weak job creation and, more recently, the credit crisis among non-bank financial institutions (IFNBs) have increased the likelihood of a more entrenched weakening,” said Moody’s.
He added that prospects for new reforms to support business investment and growth at high levels, and significantly broaden the narrow tax base, have diminished.
Moody’s projected India’s economic growth for the fiscal 2020-21 at 0 percent, less than the 4.8 percent estimated in 2019-20. Growth is expected to recover to 6.6 percent in fiscal 2021-22.
For calendar year 2020, Moody’s had projected growth of 0.2 percent last month.
The rapid and growing expansion of COVID-19, the deterioration of the world economic outlook, the drop in oil prices and the turmoil in the financial markets are creating a severe and extensive economic and financial shock, Moody’s said.
“Lower growth and government revenue generation, along with fiscal stimulus measures related to the coronavirus, will lead to higher public debt ratios, which we project to increase to about 81 percent of gross domestic product (GDP) in the next years”. celebrated.
Today, India’s debt is approximately 72 percent of 2019’s estimated GDP.
He said the economic shock of the pandemic and the fiscal policy response will result in a significant slippage of the fiscal deficit target of 3.5 percent in the current fiscal.
“Additional increases in fiscal spending to support the economy, combined with weaker general revenues and disinvestment revenues, are likely to propel the central government deficit to around 5.5 percent of GDP in fiscal year 2020 (2020- 21), “said Moody’s.
The international rating agency said that the constant slippage of central government deficit targets, a widening of deficits at the state level and challenges in the implementation of the goods and services tax indicate that the formulation of fiscal policies has been ” less effective. ”
Furthermore, the slow progress in solving the asset quality problems of the banking sector and addressing the risks of the non-bank financial sector, as well as the lack of progress in land and labor reforms at the national level, they highlight still important issues of policy and government effectiveness, he added.
The prospects for India’s debt burden depend significantly on trends in nominal GDP growth, he said.
On March 26, the government had announced a stimulus package worth Rs 1.7 lakh crore that included free food grains and cooking gas for the poor and cash for poor women and the elderly.
A second package, targeting industries, is said to be in the works and is likely to be announced shortly.
“In general, the fiscal stimulus is modest compared to the support packages implemented in many other countries, particularly given the breadth of India’s national closure measures.
“We hope that the government will announce additional measures in the future … While the measures will help reduce some of the economic damage to households, the blockage and continued stress on the financial system will cause a sharp decline in overall growth in the India, exacerbating tax pressures, “he said.
Several international agencies, including the International Monetary Fund and the World Bank, have lowered India’s growth forecast due to concerns about the consequences of the COVID-19 pandemic.
The IMF has lowered India’s GDP growth projection to 1.9 percent in 2020 from 5.8 percent estimated in January.
Similarly, the World Bank has estimated that the Indian economy will grow between 1.5 and 2.8 percent in the period 2020-21.
Fitch has projected that India’s GDP will grow by 0.8 percent this fiscal year, while S&P sets India’s GDP growth at 1.8 percent in the current fiscal year.
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