Download Android App Download IOS App
Open An Account
News,Article,Findoc | September 30
India’s rating cut puts its economic health in focus and prompts calls for policy reforms

Source- India’s rating cut puts its economic health in focus and prompts calls for policy reforms

Moody`s Investors Service downgraded India`s credit ratings to a notch above `junk` status on June 1 – the agency’s first significant downgrade of the country in the past 22 years.

The move laid bare India’s economic weak spots and is prompting calls for bold policies to revive an economy that was already struggling before the coronavirus pandemic hit, analysts and business leaders say.

“This would put additional pressure on the central government to kickstart the economy which has been severely impacted by the Covid-19 lockdown,” says Niranjan Hiranandani, the managing director of Hiranandani Group, a Mumbai-based property developer, and the president of industry lobby groups Assocham and Naredco.

Moody`s, on Monday, downgraded India`s sovereign rating to `Baa3` from `Baa2`, which is the lowest investment grade, and maintained its negative outlook.

The ratings agency said this reflected its view that “the country`s policymaking institutions will be challenged in enacting and implementing policies which effectively mitigate the risks of a sustained period of relatively low growth, significant further deterioration in the general government fiscal position and stress in the financial sector”.

While Moody’s downgrade comes as the country is grappling with a rising number of coronavirus cases, the ratings agency was quick to clarify that the downgrade “was not driven by the impact of the pandemic”.“Rather, the pandemic amplifies vulnerabilities in India`s credit profile that were present and building prior to the shock”, Moody`s said.

Analysts say the negative outlook is a major worry. Credit ratings affect a country`s ability to borrow funds and attract foreign investment – a key focus of Prime Minister Narendra Modi’s government since it first came to power in 2014.

“Moody’s decision to downgrade India’s sovereign rating, along with a negative outlook, implies a possibility of further downgrade which, if it happens, will take the rating below investment grade,” says Sankar Chakraborti, chief executive of Acuité Ratings & Research.

India’s growth numbers are also not encouraging. Asia’s third largest-economy’s gross domestic product growth slowed to 4.7 per cent during the fourth quarter year of 2019, touching a seven-year low, official figures show. The economy had been on a downward spiral for several quarters.

The virus outbreak and the subsequent nationwide lockdown, which began on March 25, have further increased its economic woes. India`s latest GDP data for the first three months of the year reveal that the economy grew by just 3.1 per cent. Analysts are forecasting a sharp contraction of up to 45 per cent for the April to June quarter.

Meanwhile, as many businesses ground to a halt during the lockdown, unemployment in India has soared above 27 per cent, according to the Centre for Monitoring Indian Economy.

The consensus is that India needs growth levels of around 8 per cent annually to create enough jobs for the country`s young population and lift people out of poverty.

Policy reforms discussed by the government include bold changes to the country`s archaic land and labour laws to make it easier for companies to do business, analysts say.

“We believe the subdued policy response for the short-term alleviation of the lockdown-related stress will lead to subdued economic growth and lower tax collection,” says Abhimanyu Sofat, the head of research at IIFL Securities, headquartered in Mumbai. “This is likely to aggravate the weakness in the credit profile of India. The policy of a balancing act seems to have not given the desired results.”

Mr Modi addressed the matter of land, labour and law reforms during his speech last month, when he announced a $266 billion (Dh976.9bn) economic package.

Some experts believe the coronavirus pandemic could be the push the government needs to enact such bold reforms.

“As a young nation now seeks bolder, stronger, more effective change, Covid-19 has put India in the middle of the perfect storm for deep reform,” says Gautam Chikermane, vice president at the Observer Research Foundation.

“Big economic reforms were last seen in 1991 when the economy opened up by reducing licences and permits.”

But in a democratic country, issues such as land and labour are a “political hot potato”, Mr Chikermane says.

Some states, including Gujarat and Uttar Pradesh, have relaxed labour laws in an effort to revive economic activity. But without conducive policies nationwide, analysts say the outlook remains bleak for India`s ratings.

Shilan Shah, senior India economist at Capital Economics, says the Moody`s downgrade came as little surprise. “If anything, the surprise was that the move took so long,” he says.

Mr Shah writes in a research note that “the downgrade simply brings Moody’s into line with other ratings agencies, which helps explain why financial markets took the announcement in their stride”.

Bond markets are not likely to be dramatically swayed going forward, he adds.

“Looking ahead, even as the fiscal cost of the coronavirus crisis mounts and the threat of further ratings downgrades looms, we think that bond yields will remain close to their current low level, given the benign inflation outlook and the likelihood of further policy easing from the Reserve Bank of India.”

Also helping the situation for now is the fact the Indian government is easing its strict lockdown and allowing the economy to open up. From Monday, offices, shopping malls and restaurants will be permitted to reopen, although states across the country are not necessarily relaxing restrictions fully. Mumbai, the worst affected city in terms of confirmed Covid-19 infections, will only allow offices to reopen with 10 per cent of their workforces from Monday, while shopping malls will remain shut in India`s financial capital.

“The impact on the economy is visible as no, or minimum, activity was seen in the past two months,” says Sumit Kochar, the senior wealth and transaction adviser at Findoc Group, an Indian financial services company.

Financial stress on banks is only projected to worsen, given the impact of the pandemic and lockdown, he adds.

“Credit growth will be slow in the next few quarters and asset quality of banks and profitability will weaken,” says Mr Kochar. “The economy and investment climate are interrelated. With recovery in the economy expected to take three to four quarters at least, the same goes for the investment climate.”

Goldman Sachs is forecasting India`s GDP growth to contract 5 per cent in the current financial year, which runs until the end of March.

Julius Baer`s Mark Matthews, the Asia head of research, and Magdalene Teo, the Asia head of fixed income research, wrote in a research note that Moody`s negative outlook is a concern. But they add that the rating agency “is likely to give India some time before the final downgrade”.

“Were it to downgrade India further, it would take the country’s rating into high yield, with negative implications for the financing of external debt,” according to Julius Baer.

“But even this is not a very critical problem, as the country’s reliance on external debt is minimal. Moody’s last downgrade of India was in 1998 and we do not think it will be in a hurry to make yet another one.”

Acuité Ratings & Research’s Mr Chakraborti says that there are factors in India`s favour, include its record foreign exchange reserves, which stand at $493bn.

“We believe that the global rating agencies should take cognizance of India’s resilience through past economic crises since the 1990s, its adequate foreign currency reserves and its institutional and regulatory framework that has strengthened over the past two decades,” he says.

He is optimistic India can recover from its current position – although it will take time.

“The current economic scenario has set the stage for robust economic reforms which will help to weather the current crisis and [act as] a reset to the earlier growth trajectory in another two to three years,” says Mr Chakraborti.