Finance & Markets

Moody’s reduced Baa3 rating for India citing Modi governments fiscal mismanagement

Moody’s Investors Service (‘Moody’s’) has downgraded the Government of India‘s foreign-currency and local-currency long-term issuer ratings, and local-currency senior unsecured rating to Baa3 from Baa2. The short-term local-currency rating went down to P-3 from P-2. The overall outlook is marked negative.

The downgrading of India shows years of neglect of Indian financial systems due to part-time and inept Finance Ministers who managed ministry by browbeating opposition than by policy changes. The exit of RBI Governor Raghuram Rajan is also telling on the economy.

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Why Moody’s upgraded India rating to Baa2 in 2017?

Moody’s writes that the November 2017 upgrade to Baa2 was because of its ‘expectation‘ that effective implementation of key reforms would strengthen the sovereign’s credit profile through a gradual but persistent improvement in economic, institutional and fiscal strength.

Reasons for downgrading India rating to Baa3 in 2020?

a) Weak Reforms: Moody’s finds that “implementation of these reforms has been relatively weak and has not resulted in material credit improvements, indicating limited policy effectiveness.

b) Prolonged slow growth: As per Moody’s “India faces a prolonged period of slower growth relative to the country’s potential, rising debt, further weakening of debt affordability and persistent stress in parts of the financial system, all of which the country’s policymaking institutions will be challenged to mitigate and contain.”

Moody’s also writes that “Real GDP growth has declined from a high of 8.3% in fiscal 2016 (ending March 2017) to 4.2% in fiscal 2019.

It is not Corona Virus Stupid

Moody’s argues that the rating downgrade is undertaken in the context of coronavirus pandemic but is not driven by it. The rating agency argues that “over the longer term, growth rates are likely to be materially lower than in the past, due to persistent weak private sector investment, tepid job creation and an impaired financial system.”

What else changed?

Moody’s also lowered India’s long-term foreign-currency bond and bank deposit ceilings to Baa2 and Baa3, from Baa1 and Baa2, respectively. The short-term foreign-currency bond ceiling remains unchanged at Prime-2, and the short-term foreign-currency bank deposit ceiling was lowered to Prime-3 from Prime-2. The long-term local currency bond and bank deposit ceilings were lowered to A2 from A1.

Who else Downgraded India?

In May 2020, DBRS Morningstar had assigned Long-Term Foreign and Local Currency – Issuer Ratings of BBB and Short-Term Foreign and Local Currency – Issuer Ratings of R-2 (high) to India. In November 2017, the agency had withdrawn its ratings for India. Prior to the withdrawal, the rating was BBB, Stable Trend.

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Moody's reduced Baa3 rating for India citing Modi governments fiscal mismanagement

The economy never really recovered after the implementation of Demonetisation. The knee jerk reforms implemented by the Indian government has been projected as ‘masterstrokes’ in India. India has been touting itself as the fastest-growing economy while on the ground the government was half-heartedly fighting the prolonged recession induced by demonetisation and ill-thought off implementation of GST. Modi Government has always aimed to be on the better side of Rating agencies, Ease of Doing business etc but it came with the cost of taking measures that positively affect the economy.

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Frontier India News Network

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