Moody's Investors Service on Friday cut India's credit rating to negative from stable amid concerns that the country’s economic growth will remain 'materially lower than in the past.' The rating agency affirmed the Baa2 foreign-currency and local-currency long-term issuer ratings and predicted the economic growth slowdown to be in part 'long-lasting.'

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Moody's said that the decision to change the outlook partly reflects lower government and policy effectiveness at addressing long-standing economic and institutional weaknesses than it had previously estimated, leading to a gradual rise in the debt burden from already high levels.

"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," the rating agency said in a press release.

Moreover, the prospects of further reforms that would support business investment and growth at high levels, and significantly broaden the narrow tax base, have diminished, it added.

The report also noted that if nominal GDP growth does not return to high rates, it expects that the government will face very significant constraints in narrowing the general government budget deficit and preventing a rise in the debt burden.

"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,” the report stated.

The report added that it does not expect the credit crunch among NBFIs, major providers of retail loans in recent years, to be resolved quickly. With public sector banks still dealing with the legacy of non-performing loans accumulated at the beginning of the decade, credit supply is likely to remain impaired for some time, compounding the income shocks.

However, the Baa2 rating balances the country's credit strengths including its large and diverse economy and stable domestic financing base for government debt, against its principal challenges including high government debt, weak social and physical infrastructure and a fragile financial sector.

Meanwhile the Finance Ministry, in response to Moody's credit rating cut said that India continues to be among the fastest-growing major economies and its relative standing remains unaffected post the change in outlook by Moody's.

The ministry added that the IMF's outlook stated that the Indian economy is set to grow at 6.1 percent in 2019 and 7 percent in 2020. The government proactively took policy decisions in response to the global slowdown and it would result in a positive outlook and attract capital inflows, it noted.

The fundamentals of the Indian economy remain robust with inflation under check, it said, adding that India continues to offer strong growth prospects in the near and medium term.

First Published:Nov 8, 2019 7:50 AM IST