New York, November 07, 2019 -- Moody's Investors Service ("Moody's") has today
changed the outlook on the Government of India's ratings to negative
from stable and affirmed the Baa2 foreign-currency and local-currency
long-term issuer ratings. Moody's also affirmed India's
Baa2 local-currency senior unsecured rating and its P-2
other short-term local-currency rating.
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.
While government measures to support the economy should help to reduce
the depth and duration of India's growth slowdown, 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. Moreover, the 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 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.
The Baa2 rating balances the country's credit strengths including
its large and diverse economy and stable domestic financing base for government
debt, against its principal challenges including high government
debt, weak social and physical infrastructure and a fragile financial
India's long-term foreign-currency bond and bank deposit
ceilings remain unchanged at Baa1 and Baa2, respectively.
The short-term foreign-currency bond and bank deposit ceilings
remain unchanged at Prime-2. The long-term local
currency bond and deposit ceilings remain unchanged at A1.
A full list of affected ratings is provided towards the end of this press
RATIONALE FOR CHANGING THE OUTLOOK TO NEGATIVE FROM STABLE
RISING RISK OF AN ENTRENCHED GROWTH SLOWDOWN AS MEDIUM-TERM REFORM
PROSPECTS HAVE DIMMED AND STRESS IN THE FINANCIAL SECTOR HAS INCREASED
India's economic growth has slowed materially, with real and
nominal GDP growth falling to 5% and 8% year on year in
April-June 2019, respectively. Moody's estimates
that the growth slowdown is in part long-lasting. Moreover,
compared with two years ago when Moody's upgraded India's
rating to Baa2 from Baa3, the probability of sustained real GDP
growth at or above 8% has significantly diminished. Rather,
the downside risks to the growth outlook have increased as prospects for
economic and institutional reforms that would lift and maintain growth
at high rates have diminished. Stress among NBFIs, with the
possibility of a more severe credit crunch that would affect credit supply,
both directly and through linkages with non-banks and banks,
adds to the downside risks to the medium-term growth outlook.
The drivers of the economic deceleration are multiple and mainly domestic.
In the context of a prolonged period of weak investment, private
consumption has slowed, driven by financial stress among rural households
and weak job creation. Moody's does not expect the credit
crunch among NBFIs, major providers of retail loans in recent years,
to be resolved quickly. With public sector banks still dealing
with the legacy of non-performing loans accumulated at the beginning
of the decade, credit supply is likely to remain impaired for some
time, compounding the income shocks. With a per-capita
income of around $7,900 on a purchasing power parity (PPP)
basis in 2018, Indian households' capacity to absorb such negative
shocks is limited.
In recent months the government has responded to the growth slowdown with
a series of measures aimed at stimulating domestic demand. These
include income support to farmers and low-income households,
help for stressed industries including autos and NBFIs, and a broad
corporate tax cut that reduced the base rate to 22% from 30%.
Meanwhile, the Reserve Bank of India has repeatedly cut the policy
rate, by a cumulative 135 basis points since February 2019.
Although Moody's expects these measures to provide support to the
economy, they are unlikely to restore productivity and real GDP
growth to previous rates. Moreover, the multiple facets of
the slowdown and structural weaknesses in the real economy and financial
system that it reflects point to further downside risks to Moody's
expectations that real and nominal GDP growth will rise towards 6.6%
and 11% respectively over the next year.
In turn, a prolonged period of slower economic growth would dampen
income growth and the pace of improvements in living standards,
and potentially constrain the policy options to drive sustained high investment
growth over the medium-to long term.
Looking forward, potential GDP growth and employment generation
will remain constrained unless reforms are advanced to directly reduce
restrictions on the productivity of labor and land, stimulate private
sector investment, and sustainably strengthen the financial sector.
Moody's considers the prospects for effective implementation of
such reforms to have diminished since its upgrade of India's sovereign
rating in 2017. In the absence of such reforms, structural
constraints on productivity and job creation, will weigh further
on India's sovereign credit profile.
PROSPECTS FOR THE DEBT BURDEN TO DECLINE HAVE DIMINISHED, WITH RISKS
THAT IT MAY RISE GRADUALLY
The rate of India's nominal GDP growth over the next few years will
have a critical impact on the government's ability to address its
relatively weak fiscal position.
At about 67% of GDP in 2018, India's general government
(combined central and state governments) debt is materially larger than
the Baa median of around 52%. Meanwhile, interest
payments comprise about 23% of general government revenue,
the highest interest burden among Baa-rated peers and three times
the Baa median of 8%.
Under Moody's assumption of a slight pick-up in GDP growth,
scope for the government to narrow the budget deficit will remain very
limited. For instance, with the recently announced corporate
tax cuts and lower nominal GDP growth, Moody's now expects
a central government deficit of 3.7% of GDP in the fiscal
year ending in March 2020 (fiscal 2019), marking a 0.4 percentage
point slippage from its target despite significant one-off revenue
from the special RBI dividend payment. Government disinvestment
(asset sales) could fill some of the gap between actual and expected deficits;
however, budgeted targets have not always been met in years past.
State deficits will likely be at or very close to the 3% of GDP
cap. A deeper liquidity squeeze that threatened the solvency of
some NBFIs could give rise to some fiscal costs from government support
to some institutions.
In this context, Moody's analysis shows that the outlook for
the debt burden is significantly dependent on trends in nominal GDP growth.
Indeed, India's historically high rate of nominal GDP growth
was an important driver of a declining debt burden in the past,
from above 80% of GDP in the early 2000s to about 67% in
2010. Now, under nominal GDP growth of around 11%,
which Moody's broadly projects as its baseline over the next few
years, the debt burden will remain around 68% of GDP.
The downside risks to growth explained above point to risks that,
instead of falling as expected previously, the debt burden rises
gradually. In that scenario, India's already very weak
debt affordability would weaken further, constraining fiscal flexibility
even more. If such developments were to encourage greater reliance
on state-owned enterprises to meet the country's need for social
and physical infrastructure, the sovereign's contingent liability
risks would rise commensurately.
RATIONALE FOR AFFIRMING THE Baa2 RATING
The Baa2 rating reflects India's large and diverse economy and stable
domestic financing base for government debt, balanced by its high
government debt burden, weak infrastructure and a fragile financial
With nominal GDP of $2.7 trillion in 2018 India's
economy is the largest among Baa-rated sovereigns. The Indian
economy has been supported by its very large domestic market, which
has provided consistently strong domestic demand, fueled by rising
incomes, which has historically helped to shelter it from the impact
of external demand shocks. Nonetheless, although at currently
slower rates India's growth still remains high by international
standards, weak infrastructure, rigidities in labor and product
markets, and ongoing asset quality challenges in the financial system
continue to constrain the economy's potential.
At the same time, a large pool of domestic private savings,
available to finance government debt, partly mitigates the sovereign's
fiscal risks posed by high government debt and weak debt affordability.
High savings have enabled the government to issue long maturity debt,
over 90% of which is owed to domestic institutions and denominated
in local currency. As a result, despite its large fiscal
deficits, India's gross financing requirements are moderate
and relatively insulated from external financing and exchange rate risk.
The longer maturity profile of government debt, averaging close
to 10 years, also lowers the impact of interest rate volatility
on debt servicing costs.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Environmental considerations are material to India's rating,
as the country is vulnerable to climate change. For example,
monsoon rains are critical for India's agricultural sector, given
that almost half the country's farm land is not irrigated. Half
of India's overall consumption comes from the rural sector and many rural
incomes are dependent on agriculture. The magnitude and dispersion
of seasonal monsoon rainfall continue to influence agricultural sector
growth, food inflation and rural household consumption. As
a result, droughts can create economic, fiscal and social
costs for the sovereign. Elevated levels of pollution and rising
concerns around water scarcity and management, also present environmental
Social considerations are material to India's credit profile,
mainly related to demographics driven by India's young and growing working-age
population. The United Nations estimates that India's working
age population (15 to 64 years old) will continue to rise from about 66%
of the total in 2018 to about 68% in 2030-40. Meanwhile,
6 to 8 million youths will enter the labor force every year through 2030.
This creates both opportunities, through a higher contribution of
labor to potential growth, and social challenges, if job creation
does not keep pace with India's working age population growth.
Governance is material to India's credit profile. The country's
scores are moderate on institutional factors, as measured by the
Worldwide Governance Indicators, reflecting moderate government
and policy effectiveness.
WHAT WOULD CHANGE THE RATING UP
The negative outlook indicates that an upgrade is unlikely in the near
term. Moody's would likely change the rating outlook to stable
if the likelihood that fiscal metrics would stabilize and improve over
time increased significantly. This would probably result from renewed
indications that economic and institutional reforms would support sustained,
strong investment and GDP growth, and broaden the government's
revenue base over the medium term. In particular, at this
juncture, a credible and durable stabilization of the non-bank
financial sector that reduced the possibility of negative spillovers to
banks and restored strong credit provision to productive sectors would
be credit positive.
WHAT WOULD CHANGE THE RATING DOWN
Moody's would likely downgrade India's ratings if its fiscal
metrics were increasingly likely to weaken materially. This would
probably happen in the context of a prolonged or deep slowdown in growth,
with only limited prospects that the government would be able to restore
stronger growth through economic and institutional reforms. A marked
and long-lasting weakening in the health of the financial sector
would both raise the associated fiscal costs should the government need
to support some institutions and increase the risk that growth remains
too low to prevent a rise in the debt burden.
GDP per capita (PPP basis, US$): 7,859 (2018
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 6.8% (2018 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 2.9%
Gen. Gov. Financial Balance/GDP: -5.9%
(2018 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -2.1% (2018 Actual)
(also known as External Balance)
External debt/GDP: 20.0% (2018 Actual)
Level of economic development: High level of economic resilience
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 04 November 2019, a rating committee was called to discuss the
rating of the India, Government of. The main points raised
during the discussion were: The issuer's economic fundamentals,
including its economic strength, have not materially changed.
The issuer's institutional strength/ framework, have not materially
changed. The issuer's fiscal or financial strength, including
its debt profile, has not materially changed. The issuer's
susceptibility to event risks has materially increased.
The principal methodology used in these ratings was Sovereign Bond Ratings
published in November 2018. Please see the Rating Methodologies
page on www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used
in this credit rating action, if applicable
LIST OF AFFECTED RATINGS
..Issuer: India, Government of
....Long-term Issuer Rating (Foreign
and Local Currency), Affirmed Baa2
....Senior Unsecured Regular Bond/Debenture
(Local Currency), Affirmed Baa2
....Other Short-Term Rating (Local
Currency), Affirmed P-2
....Outlook, Changed To Negative From
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
ratings in accordance with Moody's rating practices. For ratings
issued on a support provider, this announcement provides certain
regulatory disclosures in relation to the credit rating action on the
support provider and in relation to each particular credit rating action
for securities that derive their credit ratings from the support provider's
credit rating. For provisional ratings, this announcement
provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
be assigned subsequent to the final issuance of the debt, in each
case where the transaction structure and terms have not changed prior
to the assignment of the definitive rating in a manner that would have
affected the rating. For further information please see the ratings
tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653