From UPSC perspective, the following things are important :
Prelims level : Not Much
Mains level : Signs of economic slowdown in the country
The Moody’s Investors Service downgraded the Government of India’s foreign-currency and local-currency long-term issuer ratings to “Baa3” from “Baa2”. It stated that the outlook remained “negative”.
Practice question for mains:
Q. Why India’s GDP growth rate is being labelled an overestimate yet again by the global credit rating agencies? Discuss this in context to the latest downgrade of Indian Economy as highlighted by the Moody’s.
Why this matters?
- The Moody’s is historically the most optimistic rating agency about India.
- This downgrade challenges India’s policymaking institutions.
- They will be challenged in enacting and implementing policies which effectively mitigate the risks of a sustained period of relatively low growth.
What is the reason for this downgrade?
There are four main reasons why Moody’s has taken the decision:
- Weak implementation of economic reforms since 2017
- Relatively low economic growth over a sustained period
- A significant deterioration in the fiscal position of governments (central and state)
- And the rising stress in India’s financial sector
What does “negative” outlook mean?
- The negative outlook reflects dominant, mutually-reinforcing, downside risks from deeper stresses in the economy and financial system.
- These could lead to more severe and prolonged erosion in fiscal strength than Moody’s current projections.
- The ratings have highlighted persistent structural challenges to fast economic growth such as “weak infrastructure, rigidities in labour, land and product markets, and rising financial sector risks”.
- In other words, a “negative” implies India could be rated down further.
Is the downgrade because of Covid-19 impact?
No. The pandemic has amplified vulnerabilities in India’s credit profile that were present and building prior to the shock, and which motivated the assignment of a negative outlook last year.
Then why did the downgrade happen?
- More than two years ago, in November 2017, Moody’s had upgraded India’s rating to “Baa2” with a “stable” outlook.
- At that time, it expected that effective implementation of key reforms would strengthen the sovereign’s credit profile through gradual but persistent measures.
- But those hopes were belied. Since that upgrade in 2017, implementation of reforms has been relatively weak and has not resulted in material credit improvements, indicating limited policy effectiveness.
- Each year, the central government has failed to meet its fiscal deficit (essentially the total borrowings from the market) target.
- This has led to a steady accretion of total government debt.
What will be the implications of this downgrade?
- Ratings are based on the overall health of the economy and the state of government finances.
- When India’s sovereign rating is downgraded, it becomes costlier for the Indian government as well as all Indian companies to raise funds because now the world sees such debt as a riskier proposition.
- A rating downgrade means that bonds issued by the Indian governments are now “riskier” than before.
- The weaker economic growth and worsening fiscal health undermine a government’s ability to pay back.
- Lower risk is better because it allows governments and companies of that country to raise debts at a lower rate of interest.