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India faces rating downgrade: Nomura


India faces a downgrade by sovereign credit assessor Moody’s Investors Service if the slowdown in Asia’s third-largest economy is worsened by the countrywide coronavirus lockdown.

Nomura Global Markets Research warned that the nation of 1.4 billion people could see a 6.1% contraction in second-quarter GDP and a further 0.5% decline in the following three months as the shuttering of the economy takes a 7.5% bite out of GDP.

“There is a rising risk of an imminent downgrade by Moody’s to Baa3 ‘stable’ from Baa2 ‘negative,’’ analysts Sonal Varma and Aurodeep Nandi wrote in a note to clients. A Moody’s downgrade would bring its India rating on par with those of S&P and Fitch, which rank India at BBB-. Nomura also expects Fitch to change its outlook on India to negative because of deteriorating debt dynamics and its assessment that the nation has a poor fiscal track record. 

India’s $2.7 trillion economic growth has been slowing over the past few years and the lockdown since March 24 is expected to slow overall growth further. Real GDP could contract by 0.4% in this fiscal year, which ends next March, from 4.6% in FY20, which ended last month, it said.  

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Throughout 2020, real GDP could fall 0.5% year-on-year, compared with 5.3% expansion in 2019, the report said. Growth in the quarter to March was 3.2% and is expected to recover to 1.4% in the fourth quarter. 

“India’s Achilles heel on ratings is its parlous state of fiscal affairs and the risk of a sharp deterioration of general government debt from about 70% of GDP to potentially about 75%-80%,’’ the analysts wrote. 

Even after the lockdown, due for a review on May 3, is lifted the economy faces difficulty in reviving as it must grapple with problems of raw material supplies, demand shortages, declining availability of labour and the need to ensure social distancing in a sanitised environment. 

India was already in the middle of a banking and shadow banking crisis before the lockdown and now faces a household debt problem after it’s lifted. Most Indians depleted their savings during quarantine, and daily earners have been forced to scrounge for sustenance, depleting future demand and work potential. Additionally, hundreds of thousands of migrant workers laid off from factories and farms walked hundreds of miles back home. It may not be as simple to bring them back.


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