Just two years after the ratings upgrade in Nov 2017, Moody’s investor service has now changed its outlook from “Stable” to “Negative” for India’s sovereign rating of Baa2 (Still a second-lowest investment-grade score).
Why this mood swing?
As per Moody’s projections, the fiscal deficit is going to be 3.7% for FY20, a significant deviation from the Government’s set target of 3.3%, due to slower growth and revenue hit from the corporate tax rate.
Even after many stimuli, Moody’s believe that the government and policies are ineffective at addressing long-standing economic and institutional weaknesses than Moody’s had previously estimated. Also, this will lead to an increase in the debt burden, which is already at a high level.
Quick response from Finance Ministry
The government in its press release said that it has undertaken a series of steps for the financial sector and other reforms to strengthen the economy as a whole and has reformed policies to tackle the global slowdown. In order to reassure global investors, the press release also stated that the fundamentals of the economy are quite robust and India offers prospects of growth in the medium and long term.
Market echoed with the GOI
The markets didn’t respond very aggressively to the downgrade news. While rating agency analyses are “rearview mirror” driven, the market price in the future. Analysts still believe that the market is looking positive because of the structural changes and the government’s steady response at multiple levels across the entire spectrum. At the same time, economists believe the ongoing slowdown is here to stay for some time and governments push will take few more quarters to reflect into the desired growth.
Nonetheless, Moody’s downgrade is just a reminder that the government still needs to come up with a robust roadmap to bring back the juggernaut on a high growth track.