Image: ShutterstockMoody's Investors Service on Monday downgraded India’s foreign-currency and local-currency long-term issuer ratings to Baa3 from Baa2. The main rationale is that “India’s policy making institutions will be challenged in enacting and implementing policies which effectively mitigate the risks of a sustained period of relatively low growth, significant further deterioration in the general government fiscal position and stress in the financial sector,” it said in a media statement. This comes just two days after the country reported its lowest pace of growth in 11 years—at 3.1 percent for the March-ended and 4.2 percent FY20 period. Construction, real estate and manufacturing growth all decelerated, dragging the figure well below the Q4FY19 figure of 5.8 percent. Moody's has also downgraded India's local-currency senior unsecured rating to Baa3 from Baa2, and its short-term local currency rating to P-3 from P-2. “The outlook remains negative,” it added. “India faces a prolonged period of slower growth relative to the country's potential, rising debt, further weakening of debt affordability and persistent stress in parts of the financial system, all of which the country's policymaking institutions will be challenged to mitigate and contain,” the ratings agency said. Moody's expects India's real GDP to contract by 4.0% in fiscal 2020. “Thereafter and over the longer term, growth rates are likely to be materially lower than in the past, due to persistent weak private sector investment, tepid job creation and an impaired financial system. In turn, a prolonged period of slower growth may dampen the pace of improvements in living standards that would help support sustained higher investment growth and consumption,” the ratings agency added. Ajay Bodke, chief executive for portfolio management services at brokerage Prabhudas Lilladher says, "Rigid, inelastic and ever-rising pressure on government finances from salaries and interest payments juxtaposed against sharply dwindling taxation revenues leading to persistent missing of medium-term fiscal consolidation targets have proved to be the Achilles heel for India's economic downgrade by Moody’s.” “Significantly higher debt burden as compared to peers in the same ratings category and escalating vulnerabilities for the extremely fragile, grossly undercapitalised banking and finance sector due to an expected spike in bad loans will continue to weigh heavily on any prospect of rapid economic recovery. Coming as it does in the midst of a frightening Covid-19 pandemic, the road ahead does look daunting,” Bodke told Forbes India. Unlocking as Covid-19 cases rise
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