India's outlook cut to 'negative' as Moody's warns of growth risks

Moody’s Investors Service has changed the outlook on India’s ratings to ‘negative’ from ‘stable

Moody’s Investors Service has changed the outlook on India’s ratings to ‘negative’ from ‘stable

"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", Moody's Investors Service said in a statement.

This prompted a slew of rate cuts by the central bank, while the government rolled out several measures, including a sharp cut in corporate taxes, in a bid to boost growth. "If nominal GDP growth does not return to high rates, Moody's expects that the government will face very significant constraints in narrowing the general government budget deficit and preventing a rise in the debt burden". It cut India's outlook to negative, the first step toward a downgrade.

The government on Friday said the fundamentals of the economy remain quite robust with inflation under check and bond yields low.

The Government has undertaken a series of the financial sector and other reforms to strengthen the economy as a whole.

"Stress among non-bank financial institutions with the possibility of a more severe credit crunch that would affect credit supply, both directly and indirectly through linkages with non-banks and banks, adds to the downside risks to the medium-term growth outlook", the ratings company said in a statement.

The report added that it does not expect the credit crunch among NBFIs, major providers of retail loans in recent years, to be resolved quickly.

Investors will closely watch the nation's gross domestic product data for signs of further, long-lasting weakness, which could result in another negative shift, according to Moody's.

"There have been some concerns about fiscal slippage", said Shamaila Khan, director of emerging-market debt at AllianceBernstein in NY.

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