Indian Ministry of Finance has reacted strongly after U.S. based global rating agency Moody’s Investors Service downgraded India’s sovereign rating outlook from ‘stable’ to ‘negative’
The Ministry of Finance (MoF), India has reacted strongly after the United States (U.S.) based global rating agency Moody’s Investors Service downgraded India’s sovereign rating (Baa2) outlook from ‘stable’ to ‘negative’ today, i.e., Friday, November 8, 2019.
The Ministry of Finance believes that the fundamentals of India’s economy remain quite robust and the recent series of reforms, undertaken by MoF, would stimulate investments and strengthen the economy.
A statement issued by MoF read, “Government of India has also proactively taken policy decisions in response to the global slowdown. These measures would lead to a positive outlook on India and would attract capital flows and stimulate investments.”
It further read, “The fundamentals of the economy remain quite robust with inflation under check and bond yields low. India continues to offer strong prospects of growth in the near and medium-term.”
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The outlook by Moody’s has put India in the 2nd lowest investment grade score. As a matter of fact, the slowdown of Indian economy has been a major cause of concern in the recent past. The credit quality of Indian companies has plummeted to a record low as Prime Minister of India – Narendra Modi’s Government struggles to revive economic economy, which has hit a 6-year low.
The inefficiency of Government agencies in tackling the economic crisis, prolonged financial stress among rural households, paucity of jobs credit crunch among Non-Banking Financial Companies (NBFCs), have also resulted in slowdown of the Indian economy.
The Indian economy grew by 5% between April and June 2019 because of low consumer demand and Government spending. The Government has desisted from announcing any large fiscal stimulus package to boost the slowing consumption. However, on November 6, 2019, the Cabinet cleared a package of Rs. 25,000 crores to revive the stalled housing projects and the ailing real estate sector. Prior to this, in September 2019, the MoF had slashed the corporate tax rate for domestic companies from 30% to 25.17%, inclusive of all cess and surcharges.
According to the rating agency, these measures and the policy rate cuts by the Reserve Bank of India (RBI) will only provide support to the economy and will not help in restoring the productivity and Gross Domestic Product (GDP) growth to previous rates.
Moody’s said in a statement, “Moody’s decision to change the outlook to negative reflects increasing risks that economic growth will remain materially lower than in the past, partly reflecting lower government and policy effectiveness at addressing long-standing economic and institutional weaknesses than Moody’s had previously estimated, leading to a gradual rise in the debt burden from already high levels.”
Countering the Moody’s rating, the MoF gave the reference of World Economic Outlook, a biennial report by International Monetary Fund (IMF), which states that Indian economy will grow at 6.1% in 2019 and will reach upto 7% in 2020.
According to Moody’s the prospects of further reforms that can support business investment and growth at higher levels and significantly broaden the narrow tax base, have diminished.
If nominal Gross Domestic Product (GDP) does not return to high rates, the Government will face very significant constraints in narrowing the general Government budget deficit and preventing a rise in the debt burden.
It is to be noted that while Moody’s has altered the India’s rating, other agencies such as Fitch Ratings and S&P Global Ratings, still hold India under the ‘stable’ category.
