Yet another warning on the economy

Moody’s Investors Service’s downgrading of India’s long-term foreign currency and local currency ratings underlines a grim reading of not only the country’s stressed economic situation but also its ability to recover from the present situation. The credit rating agency has cut India’s position from Baa2 to Baa3, which is just above junk status, and has termed the outlook as negative. It had upgraded India’s rating in 2017 on the expectation that the economy would pick up, though the present slide had started even then. It had then said that the implementation of reforms would strengthen the country’s sovereign credit profile through improvement in economic, institutional and fiscal strength. It has now said that this has not happened. The ratings of some of India’s key financial institutions and corporates have also been downgraded by the agency after the sovereign rating downgrade.

It is important to note that the decision to downgrade India was not because of the Covid-19-induced lockdown and the resulting economic troubles. The lockdown only exacerbated the problems which had already built up. The agency has cited the deterioration in the country’s fiscal position, stress in the financial sector and the absence of policies to stimulate growth as grounds for its decision. They generally point to the failure of the government to arrest the economic slide and push up growth. The agency thinks that the situation may worsen in the coming months. Government finances will be badly hit by the lockdown, and government debt will rise from 72% of the GDP in 2019 to 84% in 2020. Poor growth will hurt the country’s ability to check the debt burden. The agency believes that an early recovery from the present position will be difficult. It is clear that it does not set much store by the reform measures which were recently announced and the declarations that recovery will be quick.

India remains investment grade even after the downgrade but that is cold comfort. It will be difficult for the government and companies in India to raise money abroad, or such money will become costlier in the wake of the downgrade. It will have a negative impact on perceptions about the country. There may be downgrades from other agencies. The decisions of credit rating agencies have often been criticised on various grounds, but it should be noted that they serve as the basis for decisions in the international capital market. So, Moody’s action should be taken as yet another warning about the economy and the challenges ahead.