The US-based rating agency also projected that India’s debt burden will peak at around 90 percent of GDP in the current fiscal year and that the Center’s fiscal deficit will approach 7, 5 percent of gross domestic product.
In the previous year, India’s debt burden was 72% of GDP, while the fiscal deficit stood at 4.6%.
India’s GDP contracted by 23.9% year-on-year in the April-June quarter, following the economic impact of the nationwide lockdown measures, which were in effect from the end of March until a gradual lifting of restrictions began in June.
“The collapse in GDP was one of the most pronounced among all the major G-20 economies. We now expect real GDP to contract 11.5% in the fiscal year beginning April 2020, much weaker than our own. previous forecast for a 4% contraction, “Moody’s said.
It expects growth to rebound to 10.6% in fiscal 2021, reflecting a strong statistically based effect of low 2020 GDP levels as economic activity gradually normalizes.
The sharp drop in growth will result in substantially weaker public revenues. Combined with higher fiscal spending in response to the coronavirus outbreak, this will contribute to a broader general government fiscal deficit, which we now expect to reach 12 percent of GDP in fiscal 2020, he said.
Moody’s expects the central government and the states to run fiscal deficits close to 7.5 percent and 4.5 percent of GDP, respectively. This will create a substantially higher debt burden, the agency added.
He said the economic contraction in 2020 will be more pronounced due to the lockdown and continued increase in coronavirus cases.
“As the number of coronavirus cases reported daily increases, and also extends beyond major urban centers, the possibility of renewing closure measures continues to present a downside risk to our forecasts. Even in the absence of new ones. official restrictions outside designated buffer zones, economic uncertainties could influence consumer demand and investment.
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“Beyond the pandemic, we see a risk that growth will recover more gradually than in other major emerging economies and remain below our previous expectations, held back by an increasingly deteriorated financial system and limited fiscal capacity to deliver. support, “Moody’s said.
He joined the chorus of other global and national agencies that have projected a double-digit contraction in the Indian economy.
Earlier this week, Goldman Sachs and Fitch projected that India’s economy would contract by 14.8% and 10.5%, respectively, in the current fiscal year. India Ratings and Research expected a contraction of 11.8%. The national agency Crisil estimated the contraction at 9%.
Moody’s in June downgraded India’s sovereign rating to ‘Baa3’, the lowest investment grade, just one notch above junk status, with a negative outlook.
In its credit sentiment report on the Indian government, Moody’s said that the country’s credit profile is increasingly constrained by low growth, high debt burden, and weak financial system, and these risks have been exacerbated by the coronavirus pandemic.
“The mutually reinforcing risks of deeper stresses in the economy and financial system could lead to a more severe and prolonged erosion in fiscal strength, putting further pressure on the credit profile,” Moody’s said.
He said persistent growth challenges, including weak infrastructure, rigid labor, land and product markets, and rising financial sector risks continue to limit the economy’s potential.
These structural weaknesses may affect the recovery of the economy from internal or external shocks to a greater extent than we currently assume.
Furthermore, the nature of the stress between non-bank financial institutions (NFIs) and banks is still being revealed and may turn out to be deeper and broader than what we have assessed so far, he added.
The materialization of the risks of the economic and financial system would be mutually reinforcing; a deeper and prolonged credit crisis would further limit GDP growth, increasing pressure on financial institutions’ balance sheets, the agency said.
“If downside risks to growth or the financial system materialize, it would have negative consequences for India’s fiscal strength. The longer the period of relatively moderate growth, the more likely it is that the debt burden of India continue to increase.
“And the realization of more contingent liabilities for the government, in the event of renewed financial support to financial institutions, would only increase the debt burden,” Moody’s said.
In ruling out a rating upgrade in the near future, Moody’s said India’s rating outlook could be changed to stable if economic developments and policy actions increase confidence that nominal and real growth will rise at sustainable rates. higher than it projects.
Measures that improve financial stability by strengthening supervision, regulation, and capitalization of the financial sector would support such a move. Commensurate action to halt and reverse the rise in the debt trajectory, even slowly, would also promote a stable outlook, Moody’s added.
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