Moody’s downgrade: Restricted demand revival predicted

Mumbai: International rating agency Moody‘s Investor Service has said fiscal measures including corporate tax cut, farmer income support and the monetary policy easing, taken by the Indian government and central bank, will have a limited effect in stimulating consumption demand. The agency slashed its forecast for the country’s FY20 growth rate to 4.9%, down from a previous downgrade to 5.8% and cautioned that slower growth dims prospects for significant fiscal consolidation, which will weigh on the sovereign’s credit profile.

It also cut its FY21 forecast for the country’s growth rate to 6.3% from 6.6%. “What was once an investment-led slowdown has now broadened into weakening consumption, driven by financial stress among rural households on the back of stagnating agricultural wage growth and constrained productivity, as well as weak job creation due to rigid land and labour laws,” said Deborah Tan, a Moody’s assistant vice-president and analyst. Household consumption has been the backbone of India’s growth, making up about 57% of GDP in FY2018-19.

Tax cuts, combined with lower nominal GDP growth, have dampened the outlook for fiscal consolidation and have increased the risk that debt may not stabilise – let alone decline, it said. However, the agency said, the probability of a significant and rapid deterioration in fiscal strength remains low, given the composition of government debt and the ability to withstand financing shocks. The major factors responsible for weakening economic growth were rural financial stress, low job creation and liquidity constraints, Moody’s said in a report. It noted that the credit crunch among non-bank financial institutions (NBFIs), the major providers of retail loans in recent years, has “exacerbated” this slowdown. “While the income shock to households has been unfolding over several years, it was not visible on headline growth as long as households could borrow from NBFIs. With the materialisation of a credit supply shock, we now see the impact of these twin shocks on growth,” Tan added. Moody’s expects measures to stimulate domestic demand – including income support for farmers and low-income households, monetary policy easing and a broad corporate tax cut – will be limited in offsetting this slowdown.

“Although a modest recovery is expected for next year, supported partly by spillovers from policy stimulus, economic growth will be weaker than in recent years, which will have negative credit implications for Indian issuers in a range of sectors,” it noted. In automotive, weak demand and tight liquidity will constrain automakers’ earnings. Moreover, slower economic growth over the last few quarters will also reduce debt servicing capabilities of households, which in turn will weaken the asset quality of retail loans across all segments, it said.