Earlier this year in June, Moody’s investor services downgraded India’s sovereign rating from Baa2 negative to Baa3 category for the first time in 22 years. This basically implies that India’s credit rating is just one step away from falling into the category of junk ratings.
Such a scenario generally leads to billionaires pulling out of investments, stock market crashing and the World Bank giving loans on rigid conditions, further accelerating the prevailing economic sluggishness.
Moody’s has also indicated a slow upliftment rate of economic growth, stating that the effects of the slowdown are going to be long-lasting. This implies that the financial system of the country is undergoing erosion, which is only likely to get severe in the coming months.
A downgraded moody’s outlook is indicative of the worsening economic situation in the country under normal circumstances but the times of pandemic are no ordinary ones. These are exceptional circumstances wherein the global economy is crashing and even the most developed economies are struggling to sustain growth.
Moody’s has also clarified that the pandemic is not the reason for the projected downfall. But it will amplify vulnerabilities in India’s credit profile. It is due to this that the implications of such a downgrade need to be duly measured and subsequent steps be taken in order to prevent the situation from further aggravating.
Effects of the slowdown on the Indian economy
With unemployment levels at an all-time high of 6.1%, investments at 15-20 year low, bad debt at 150 million dollars and now the recent Moody’s rating downgrade amidst the COVID-19 pandemic, there is a pressing need for foreign investments to revitalise the economy. As per union minister, Nitin Gadkari, India is in need of 50-60 Lakh crore foreign investments in order to bolster the economy, the prospect of which is bleak given the discouragement received by investors due to the downgraded ratings amidst the pandemic.
Amidst the pandemic, the downgraded ratings of India would not only cause a severe blow to the prospects of future investments, but also have an adverse impact on the previous investments. Recently, foreign investors have pulled out USD 6.4 billion from the Indian markets due to the risk adverse environment. Such challenging situations would further detract investments, as foreign investors would prefer investing in low-risk markets instead of investing in India.
Real and nominal GDP
Moody’s projection of the real and nominal GDP figures is considerably low as compared to the government’s prediction. India’s economic growth has slowed materially, with real GDP growth expected to fall 4.0% in the fiscal year 2020-21 due to outbreak of the pandemic.
Moody’s analysis shows that the outlook for the debt burden is significantly dependent on trends in real and nominal GDP growth. Nominal GDP and debt burden are inversely linked to each other. A decrease in the real or the nominal GDP indicates an increase in the debt burden and vice versa. Moody’s has predicted the debt burden for the year 2020 as 84% of the GDP, indicating that it would increase in the next financial year, thus having dire consequences for economic growth.
According to Moody, compared with two years ago when it upgraded India’s rating to Baa2 from Baa3, the probability of sustained real GDP growth at or above 8% has significantly diminished, with India’s economic growth forecast for 2020 to be (-)3.1% and GDP for 2021 to be 5.3%.
A decreased GDP projection not only indicates that the economy is in a downfall, but also according to Moody’s analysis, the chances of economic reforms improving the situation seem to be bleak due to the long-lasting effects of the economic slowdown.
With the world economy already grappling with the catastrophic effects of the pandemic, Moody’s prediction of falling real and nominal GDP and rising debt burden, non-effectiveness of the economic reforms, and the slow recovery rate make the road to revitalise the economy full of obstacles and challenges.
Non-Performing Assets (NPAs)
With the Indian economy already in distress before the world was hit by the pandemic, the pandemic is predicted to have an adverse impact on the credit supply, which is why it is expected that over USD 30.5 billion of loans would turn bad over the next 12 months.
Therefore, if the issue of NPAs continues, there will be a considerable halt in the credit supply, further choking private consumption. According to NSSO, consumption levels have fallen to an all-time low in 2017-18, the first time in the last four decades since 1972-73. If the problem of consumption is left unresolved, it would further lead to a deterioration of living standards of the people.
Foreign Direct Investments (FDI) and Foreign Portfolio Investments (FPI) are also substantially dependent on the global ratings. Moody’s downgrade will ultimately lead to a decreased FDI, further contributing to the already ongoing downfall, possibly leading the economy into recession.
Core economic sectors
Due to COVID-19, India’s eight core sectors’ output contracted 23.4% in May. These sectors experienced a substantial loss of production during the lockdown, resulting in decreased consumption.
The automobile sector (one of the core sectors of the economy), which has already been in crisis with the jobless rates at an all-time high at 8.6%, decreased foreign investments and private consumption would severely impact the automobile sector, which is one of the major job creators in India.
Decreased foreign investments due to a downgrade in the outlook ratings amidst the pandemic will also adversely impact other sectors of the economy, such as the agricultural, manufacturing and other core sectors.
The way forward
Indian entrepreneur, Kiran Mazumdar Shaw, rightly referred to this slowdown as a consumption-led slowdown. According to NSSO, consumption levels have fallen to an all time low in 2017-18, first time in the last 4 decades since 1972-73. The primary reason behind this fall down is the decelerated rural demand.
The situation of decreased demand has worsened due to the COVID-19 scenario. Therefore, in order to raise demand, there is an urgent need of infusing money into the economy. This money infusion needs to be channelised towards the most needful sectors of the economy, given the availability of limited resources with the government.
Another principal factor responsible for the economic slowdown, as stated by the agency, is the flawed implementation of certain policy reforms such as the General Sales Tax (GST) regime, Insolvency and Bankruptcy Code, and the Fiscal Responsibility and Budget Management Act, all of which were introduced with the objective of steering economic growth in the right direction.
Therefore, in order to boost economic growth, it is indispensable that the procedural elements of these economic reforms are simplified, so that the reforms achieve their desired purpose.
One of the major suggestions that have been made by various economists, including the former Reserve Bank of India (RBI) governor, Viral Acharya, is that there is a need to initiate massive disinvestment programmes. In order to cope with decreased income, the government needs money and the only viable way would be selling its stake in various companies.
Lastly, it is paramount for the government to come up with a robust economic policy to fight the adverse consequences that this pandemic will have. In order for the government to upgrade its ratings by various credit rating agencies, it is important that India comes out of the virus’ effects safe and sound. It is only after India has reached this milestone of shielding the economy from COVID-19 that it can think of fully revitalising its economy by receiving foreign investments, which would subsequently add oil to the economic machine of the country.
Views expressed are the author’s own.
Jisha Garg is a student of law at the Rajiv Gandhi National University of Law, Patiala, India.