In June 2020, Moody’s downgraded India’s sovereign rating from Baa2 to Baa3 with a negative outlook.
Rating agency Moody’s Investors Service has upgraded India’s sovereign rating outlook from ‘stable’ to ‘negative’, citing mitigation of risks from COVID-19 and negative feedback between the real economy and the financial system.
While it retained India’s rating at Baa3, indicating the lowest investment grade rating, Moody’s said it expects real GDP to surpass 2019-20 pre-pandemic levels this year, as the ongoing The economic recovery is picking up steam with activities. . It expects GDP to register a growth of 9.3% in 2021-22, followed by 7.9% growth the following year.
In June 2020, Moody’s downgraded India’s sovereign rating from Baa2 to Baa3 with a negative outlook. On Tuesday, it said the downside risks to growth from subsequent coronavirus infection waves are mitigated by increased vaccination rates and more selective use of restrictions on economic activity, as seen during the second wave.
In addition, the higher capital cushion and greater liquidity suggest that banks and non-bank financial institutions pose far less exposure to sovereigns than Moody’s.
“While the risks posed by a high debt burden and weak credit affordability remain, Moody’s expects the economic environment to allow a gradual narrowing of the general government’s fiscal deficit over the next few years, leading to a further deterioration in the sovereign credit profile. can be stopped.” the agency said.
In the medium term, Moody’s expects real GDP growth to average around 6%, reflecting a rebound in activity to potential levels once the situation normalises. “The growth projections take into account structural challenges including weak infrastructure, rigidity in labor, land and product markets, which impede private investment and contribute to the post-pandemic economic crisis,” it explained.
The rating agency said normalization of growth levels would enable “gradual fiscal consolidation and stabilization of the government’s debt burden, albeit high and above pre-pandemic levels”.
However, Moody’s said it is expected to continue with a higher debt burden and weaker debt carrying capacity compared to pre-pandemic times, which is a key factor for maintaining the Baa3 rating as it is expected to maintain ‘low fiscal strength’. ‘ will contribute.
This will offset India’s recent strong points such as a narrow current account deficit and historically high foreign exchange reserves, which have compounded the country’s vulnerabilities to external shocks.
“India’s main debt challenges, its low per capita income and its weak fiscal position, exacerbated by the coronavirus shock. India’s general government debt burden increased from 74% of GDP in 2019 to an estimated 89% of GDP in 2020, which is significantly higher than the previous year.
Ba mean of about 48%. Meanwhile, interest payments account for around 26% of general government revenue, the highest among ba-rated peers and more than three times the ba mean of 8%,” it pointed out.
“Looking ahead, Moody’s expects the debt burden to stabilize at approximately 91% over the medium term, as strong nominal GDP growth gradually shrinks, but still largely balanced by the primary deficit,” the agency said in a statement. Is.”
The upgrade in outlook to ‘stable’, Moody’s said, was driven by ‘low sensitivity’ to event risk from ‘a negative feedback loop between the financial sector and the real economy’.
“Solvency in the financial system has strengthened, credit conditions have improved, which Moody’s expects policy settings to normalise. Bank provision has allowed gradual write-off of legacy problem assets over the years. In addition, banks have strengthened their capital position, pointing to a firmer outlook for credit growth to support the economy,” it averaged.
For the country’s rating to upgrade, Moody’s said India’s economic growth potential would have to ‘materially exceed its expectations, supported by the effective implementation of government economic and financial sector reforms, resulting in the growth of the private sector. There has been a significant and sustained increase in investment’.
“Continuous decline in the debt burden of the government as a result of effective implementation of fiscal policy measures and improvement in credit affordability will also provide support to the credit profile,” it emphasized.
The agency also flagged high downside risks to India on environmental and social considerations, emphasizing that a weak government balance sheet with relatively low income levels affects the sovereign’s ability to mitigate such risks. .
“The social risk exposure is highly negative, driven by risks related to low and unequally distributed incomes, unequal access to high-quality education, housing, health care and the provision of basic services. While the government has reduced access to basic services, With significant progress in sanitation and running water, about 15% of the population is malnourished and the mortality rate at an early age is relatively high,” it pointed out.
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