India’s Pre-Covid Reforms Slowdown Sets Stage For Prolonged Low Growth: Moody’s

India's sovereign rating downgrade, according to Moody's Investor Service, is a result of a combination of factors: a weak financial sector, slow GDP growth trajectory, high debt-to-GDP ratio and a slowdown in reform momentum. And these were unfolding much before the new coronavirus pandemic hit the country.

“Obviously, Covid-19 amplifies a lot of the challenges but we've been pointing to a lot of negative trends even before Covid-19,” Gene Fang, associate managing director-sovereign risk at Moody's Investors Service, said in an interview with BloombergQuint. The agency downgraded India's sovereign rating by a notch on Monday evening, and maintained its negative outlook on the nation's financial sector and economic growth.

“I think we are focused on the challenges of slower trend in growths regardless of whether or not the outbreak was in place,” Fang said. “That was something we were looking at as early as November.”

Most of the reasons behind the downgrade, according to Fang, boil down to the slowdown in reform momentum.

The agency had upgraded India's sovereign rating in 2017 based on the higher growth and expectations of the Goods and Services Tax and Insolvency and Bankruptcy Code. While those reforms came through, there have been challenges in implementation, Fang said.

“In a way, it's been a slowdown in reform momentum which has helped contribute to what we think will be a more prolonged period of slower growth,” Fang said. “A lot of that was to some extent unfolding even before we saw the coronavirus outbreak.”

Moody's could see trends of deterioration in November as India's GDP growth remained below-potential and the financial sector remained in stress, particularly the non-banking lenders, he said. The “intertwining and mutually re-enforcing” of the stressed financial sector and weak economy lead to a further downside to Moody's outlook.

As the economy weakens, the agency expects more stress in the financial sector, posing more challenges to a stronger economic recovery, he said.

The inability of the government to meets the targets laid out by the Fiscal Responsibility and Budget Management Act weakened its fiscal position going into the coronavirus outbreak. “To some extent, it raises questions in our minds as to how quickly and effectively the FRBM targets can be brought back into focus even after the situation begins to normalise in terms of the health crisis,” he said.

At the same time, India's GDP-to-debt ratio—already high relative to peers—is only rising at a time when nominal growth is falling. This, Fang said, adds to the downside risk.

Watch the full conversation here: