Moody’s Downgrades India’s Outlook to ‘Negative’ From ‘Stable’; Slowdown Long-Lasting

India’s economic growth will remain “materially lower than in the past” according to Moody’s forecast. It predicts growth slowdown will be in part “long-lasting.”

DESPARDES — Ratings agency Moody’s downgraded India’s outlook from ‘stable’ to ‘negative’ on Thursday– India is undergoing a significant slowdown, its report concluded, citing increasing risks that the country’s economic growth will remain “materially lower than in the past.”

The look-ahead based on a look-back weighs heavily on PM Modi’s (second stint) efforts at structural reforms in taxation, banking, finance– all generally considered a medium to long-term measures specially in the region.

India has a domestic consumption-driven economy (1.34 billion population– 4 times the size of USA) which attracts global players, but sans adequate institutional reforms and strict fiscal management the playing field becomes risky, says an expert.

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Therefore “Short-term measures usually works as a quick-fix but not in such a huge economy built without adequate structural elasticity which again is not easy to build in the presence of massive undocumented economy and political expediencies”.

A crunch that started out in the non-banking financial institutions spread to retail businesses, car makers, home sales and heavy industries also, the expert added.

Various reform measures taken by Modi government since six years have been slow in depth and therefore the duration of the country’s growth slowdown, Moody’s said.

“Economic and institutional weaknesses” led to a rise in the already high levels of the debt burden, it said.

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Under Modi, India’s economic growth hit a six-year low in the April-to-June quarter. It will remain “materially lower than in the past” according to Moody’s forecast.

“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 slowdown,” Moody’s analysts said in a report.

An ongoing crisis in the finance sector has hamstrung lending, impacting investments, while recent policy reforms have left small-and-medium businesses reeling. Moreover, the Indian economy is also struggling to create enough jobs for its workforce.

Radhika Rao, an economist at Singapore’s DBS Group, told CNBC that the outlook change reflects concerns over growth and “anticipated fiscal slippage.”

While Moody’s affirmed India’s other ratings, it predicted the economic growth slowdown will be in part “long-lasting.”

The forecast comes amid slowing global economy. However, given its size and structural inefficiencies, the hit is being felt more and more could be felt, the expert said. “Therefore, Moody’s forecast that the growth slowdown would be long-lasting”.