New Delhi: Moody’s Investors Service, a global rating agency, has downgraded India’s sovereign credit rating while emphasising that the Asia’s third-largest economy will continue to face slower growth for a longer period fuelled by rising debt and stress in certain areas of the financial system.

What does the downgrade mean?

The agency has cut down the government of India’s foreign-currency and local-currency long-term issuer ratings to “Baa3” from “Baa2” on Monday while stating that the outlook remained “negative”.

The downgrade brings down India to the lowest investment grade of ratings. Moody’s has remained most optimistic about India compared to other rating agencies including Standard & Poor’s (S&P) and Fitch. The other two agencies have the lowest investment grade rating with stable outlook for India at present.

What is the reason behind this change in outlook?

There are majorly four reasons which enforced the downgrading of the India’s sovereign credit rating. The most important reason remains the poor implementation of the economic reforms along with the deterioration of economic growth over a sustained period. The downgrading was mooted because of the significant cut in the fiscal position of both central and state government besides stress in the financial sector.

Moody’s had changed the outlook on India’s rating in 2019 to “negative” from “stable” and hinted at the risks back then.

In its official statement, Moody’s said, “The decision to downgrade India’s ratings reflects Moody’s view that the country’s policymaking 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”.

What does it mean for India?

It further added the negative outlook reflects dominant, mutually-reinforcing, downside risks from deeper stresses in the economy and financial system that could lead to severe and prolonged erosion in fiscal strength than Moody’s current projects.

In particular, Moody’s has highlighted persistent structural challenges to fast economic growth such as “weak infrastructure, rigidities in labor, land and product markets, and rising financial sector risks”.

The rating is critical as it highlights the government’s reform approach which didn't yield much and consistent decline in growth even before the Covid-19 pandemic broke. The “negative” outlook also hints at further downgrade going ahead.

Moody’s has categorically mentioned that this downgrade is taking place “in the context of the Coronavirus pandemic, it was not driven by the impact of the pandemic”.