Rating agency Moody’s has downgraded India’s rating. Why? What would be the implications of the same?
Moody’s Investors Service has downgraded the Government of India’s foreign-currency and local-currency long-term issuer ratings to “Baa3” from “Baa2”. It stated that the outlook remained “negative”.
The latest downgrade reduces India to the lowest investment grade of ratings and brings Moody’s ratings for the country in line with the other two main rating agencies in the world — Standard & Poor’s (S&P) and Fitch
There are four main reasons why Moody’s has taken the decision.
One, Weak implementation of economic reforms since 2017
Two, Relatively low economic growth over a sustained period
Three, A significant deterioration in the fiscal position of governments (central and state)
Four, the rising stress in India’s financial sector
In November last year, Moody’s changed the outlook on India’s Baa2 rating to “negative” from “stable” precisely because these risks were increasing.
The decision to downgrade India’s ratings reflects Moody’s view that the country’s policymaking institutions will be challenged in enacting and implementing policies which effectively mitigate the risks of a sustained period of relatively low growth.
The negative outlook reflects dominant, mutually-reinforcing, downside risks from deeper stresses in the economy and financial system that could lead to a more severe and prolonged erosion in fiscal strength than Moody’s currently projects.
In particular, Moody’s has highlighted persistent structural challenges to fast economic growth such as “weak infrastructure, rigidities in labor, land and product markets, and rising financial sector risks.
In other words, a “negative” implies India could be rated down further.
The low effectiveness of policy and the resulting loss of growth momentum is evidenced in the sharp deceleration in India’s GDP growth rates. The provisional estimates for 2019-20 were pegged at 4.2%
Poor growth has been made worse by worsening government (both Centre and state-level) finances.
Each year, the central government has failed to meet its fiscal deficit (essentially the total borrowings from the market) target. This has led to a steady accretion of total government debt.
A rating downgrade means that bonds issued by the Indian governments are now “riskier” than before, because weaker economic growth and worsening fiscal health undermine a government’s ability to pay back.
Lower risk is better because it allows governments and companies of that country to raise debts at a lower rate of interest.
When India’s sovereign rating is downgraded, it becomes costlier for the Indian government as well as all Indian companies to raise funds because now the world sees such debt as a riskier proposition.
