Indian Prime Minister Narendra Modi
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Evaluation agency Moody's downgraded its outlook on India's rankings Thursday from "stable" to "negative", citing growing risk that the country's economic growth will remain "substantially lower than before."
Moody's said the change partly reflected lower government and policy efficiency when it came to tackling "economic and institutional weaknesses" that led to an already high level of debt burden.
India is undergoing a significant decline. Economic growth hit a six-year low in April to June, with the economy growing 5% from a year ago. An ongoing crisis in the financial sector has hindered lending and impacted investment, while recent political reforms have given small and medium-sized businesses wheels. Besides, the Indian economy is also struggling to create enough jobs for the workforce.
"While government measures to support the economy should help reduce the depth and duration of India's growth decline, financial stress among rural households, weak job creation, and more recently, a credit crisis among non-banking financial institutions (NBFIs), has increased the likelihood of a more entrenched slowdown, "Moody's analysts said in a report.
But in the Thursday report, Moody's said it "considers the prospects for effective implementation of such reforms that have been diminished since the upgrade of India's sovereign rating in 2017."
"In the absence of such reforms, structural constraints for productivity and job creation further weigh on India's superb credit profile, "said Moody's.
The latest report said prospects for further reforms – which can support high-level investment and growth and expand India's narrow tax base – have been reduced.
Government data showed that India's net tax collection in the half-year of September 30 is the lowest in the last five years, well below the government's budget target, local sales Today reported earlier this month. Lower tax revenues could put a strain on the Indian government's tax deficit target of 3.3% of GDP as it aims to apply some fiscal measures to stimulate the economy.
Radhika Rao, an economist at Singapore's DBS Group, told CNBC that the outlook reflects concern about growth and "projected tax cuts." She explained that if the government is able to demonstrate sound spending and support revenues by privatizing state assets along with expanding the tax base, those concerns would be outlined.
"Encouraging, cyclical growth momentum comes from a reduction in prices and surplus liquidity ratios, with impacts likely to appear in the second half of the fiscal year," Rao said. India's fiscal year starts April 1.
The Reserve Bank of India has cut interest rates by 135 basis points so far in 2019 to support growth and has signaled further relief.
Moody's confirmed India's other rankings and predicted the economic downturn will be "long-term in part."