The rating company, Moody’s Investors Service has cut India’s credit ratings outlook to negative from stable on concern of the stunted economic growth.
Financial stress, especially in rural areas, and low job creation calls into question how effective the nation’s government is in addressing economic sluggishness, William Foster, vice president of Moody’s Sovereign Risk Group, wrote in a statement.
“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," he wrote.
The downgrade puts additional pressure on India, which already tried to kickstart the economy in September with an unexpected cut in corporate taxes. But chances of more reforms like this have diminished, and Moody’s expects the government to struggle to narrow its deficit or contain a growing debt burden.
Investors will closely watch the nation’s gross domestic product data for signs of further, long-lasting weakness, which could result in another negative shift, according to Moody’s. Stabilization in the non-bank financial sector, meantime, would be credit positive and could flag less risk of negative spillover into banks.
“There have been some concerns about fiscal slippage," said Shamaila Khan, director of emerging-market debt at AllianceBernstein in New York. “If the government is able to maintain discipline and mitigate spending by doing more privatizations that could help allay these concerns. There’s a reasonable probability that that could happen, and this is a negative outlook so it gives them some time to play this out."
Fitch Ratings and S&P Global Ratings still hold India’s outlook at stable.