Indias credit profile to face further pressure due to Covid-19: Moodys

India’s credit profile will face further pressures amid the coronavirus outbreak, according to rating agency Moody’s.

The sharp slowdown in growth will deepen with a national lockdown to contain the coronavirus being extended till May 17. “For India, we expect a sharp slowdown in growth, with real Gross Domestic Product (GDP) growth averaging 0.2% in the 2020 calendar year, down from our previous forecast of 2.5%.”, Moody’s said in statement. Its rating of the India government is Baa2 with negative outlook.

The rapid spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and financial market turmoil are creating a severe and extensive economic and financial shock.

The lower growth and government revenue generation, coupled with coronavirus-related fiscal stimulus measures, will lead to higher government debt ratios which we project to rise to rise to around 81% of GDP over the next few years.

The shock will exacerbate an already material slowdown in economic growth, which has significantly reduced prospects for durable fiscal consolidation, Moody’s said in credit opinion.

Moody’s rating on the government of India is Baa2 with negative outlook.

India’s credit profile is supported by its large and diverse economy, and stable domestic financing base. This is balanced against high government debt, weak social and physical infrastructure, and a fragile financial sector.

The negative outlook reflects increasing risks that economic growth will remain significantly lower than in the past. This is in light of the deep shock triggered by the coronavirus outbreak.

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“The negative outlook reflects increasing risks that economic growth will remain significantly lower than in the past. This is in light of the deep shock triggered by the coronavirus outbreak, and partly reflects lower government and policy effectiveness at addressing longstanding economic and institutional weaknesses, leading to a gradual rise in the debt burden from already high levels,” the agency said in its note.

The government measures to support the economy should help to reduce the depth and duration of India’s growth slowdown. However, prolonged financial stress among rural households, weak job creation and, more recently, a credit crunch among non-bank financial institutions (NBFIs) have increased the probability of a more entrenched weakening.

Moreover, prospects of further reforms that would support business investment and growth at high levels, and significantly broaden the narrow tax base have diminished.

If nominal Gross Domestic Product (GDP) growth does not return to high rates, the government will face very significant constraints in narrowing the general government budget deficit and preventing a rise in the debt burden, it added.