In a recent development, Moody’s Investors Service, a ratings agency, has downgraded India’s sovereign ratings. This downgrade moves India’s rating from Baa2 to Baa3, the lowest investment grade on Moody’s rating ladder.
Reasons for the Downgrade
This move by the ratings agency was prompted by several factors. Firstly, they pointed out the slow reform momentum that has impacted policy effectiveness and growth potential in India. The Covid-19 pandemic only served to increase the vulnerabilities in India’s credit profile, which had been present and building prior to the global health crisis. However, Moody’s stressed that while this downgrade comes during the Covid-19 pandemic, it was not entirely driven by the pandemic’s impact.
The Implication of the Lowest Grade
A Baa3 rating is the lowest investment grade in Moody’s ladder; therefore, India now sits just one notch above a non-investment or junk grade. This downgrade comes after Moody’s had previously upgraded the country’s rating to Baa2 in November 2017.
Diminishing Growth Forecasts
According to Moody’s, the real GDP growth rate of India will contract by 4% in 2020-21 due to the effects of the coronavirus pandemic and the lockdown measures that followed. The agency foresees an economic growth of 8.7% the following financial year, and then a modest growth close to 6% in the year thereafter. These projections come in the wake of India’s GDP growth slipping to an 11-year low of 4.2% in 2019-20, and the fiscal deficit expanding to 4.6% of the GDP as against the estimated 3.8% in the previous financial year.
Identified Economic Issues
Moody’s outlined several issues hindering the Indian economy. The slow resolution of the credit crunch in the under-capitalised financial sector was a primary concern. Other red flags include a predicted long-term high debt burden due to fiscal constraints, lower GDP growth that would affect the government’s ability to reduce this increasing debt, and a limited government tax revenue base due to India’s large low-income population. Moody’s stated that efforts by the Indian government to address the growth slowdown prior to the Covid-19 outbreak, as well as the recent support package for vulnerable households and small businesses, fall short of the measures needed for sustainable GDP growth.
A Brief on Credit Ratings
A credit rating is a measure of the creditworthiness of an entity seeking to borrow money. It can be assigned to individuals, corporations, state or provincial authorities, or sovereign governments. A sovereign credit rating assesses the creditworthiness of a country or sovereign entity and provides insights about any associated investment risks, including political risk. Sovereign credit ratings are particularly important for developing countries as they greatly influence access to funding in international bond markets.
About Rating Agencies
Rating agencies assess the financial strength of companies and government entities, specifically their ability to meet principal and interest payments on their debts. The big three credit rating agencies globally are Fitch Ratings, Moody’s Investors Service, and Standard & Poor’s (S&P). In India, six credit rating agencies are registered under the Securities and Exchange Board of India (SEBI), namely, CRISIL, ICRA, CARE, SMERA, Fitch India, and Brickwork Ratings.