Moody’s Investors Service has downgraded India’s rating from ‘Baa2’ to ‘Baa3’ as the country faces a prolonged period of slower growth, rising debt, further weakening of debt affordability and persistent stress in parts of the financial system.

Maintaining a negative outlook for India, the rating agency observed that slow reform momentum and constrained policy effectiveness have contributed to a prolonged period of slow growth that started before the pandemic.

It reasoned that the country’s policymaking institutions will be challenged to mitigate and contain the risks.

The downgrade could make India Inc’s overseas borrowings costlier. However, the agency said in a statement that Baa3 is an investment grade rating and India continues to remain an investment grade economy.

While the rating action has been taken in the context of the virus outbreak, it was not driven by the pandemic impact, it added.

It expects India’s real GDP to contract by 4 per cent in the current fiscal due to the shock from the pandemic and related lockdown measures, to be followed by 8.7 per cent growth in the following fiscal and closer to 6 per cent growth thereafter.

Debt burden to rise

Moody’s opined that lower real and nominal GDP growth over the medium term will diminish the government’s ability to reduce its debt burden.

The agency assessed that prior to the outbreak, at an estimated 72 per cent of GDP in FY20, India’s government (combined Central and State governments) debt burden was 30 percentage points larger than the ‘Baa’ median. It expects the coronavirus shock to cause the debt burden to rise higher still, to about 84 per cent of GDP, in FY21.

Specifically, the agency has downgraded the Government of India’s foreign-currency and local-currency long-term issuer ratings to Baa3 from Baa2.

It has also downgraded India’s local-currency senior unsecured rating to Baa3 from Baa2, and its short-term local currency rating to P-3 from P-2.