Moody’s lowers India’s outlook to ‘negative’ from ‘stable’

India’s Prime Minister Narendra Modi

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Ratings agency Moody’s changed its outlook on India’s ratings on Thursday to “negative” from “stable,” citing increasing risks that the country’s economic growth will remain “materially lower than in the past.”

Moody’s said the change partly reflected lower government and policy effectiveness in addressing “economic and institutional weaknesses” that led to a rise in the already high levels of the debt burden.

India is undergoing a significant slowdown. Its economic growth hit a six-year low in the April-to-June quarter, during which the economy grew 5% from a year ago. 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.

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

The report added prospects of further reforms — that could support investment and growth at high levels and broaden India’s narrow tax base — have diminished.

Government data showed India’s net tax collection in the six months ended Sept. 30 is lowest in the past five years, far below the government’s budget target, local outlet Business Today reported earlier this month. Lower tax revenues could put a strain on the Indian government’s fiscal deficit target of 3.3% of GDP as it aims to spend on some fiscal measures to stimulate the economy.

Moody’s affirmed India’s other ratings and predicted the economic growth slowdown to be in part “long-lasting.”

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