Moody's says India's tax cuts, realty rescue, and bailouts are not enough to beat the slowdown

  • Rating agency Moody downgraded its outlook from stable to negative.
  • The agency said that there is an increased probability of a more entrenched slowdown.
  • A deeper liquidity squeeze that threatened the solvency of some NBFIs could give rise to some fiscal costs, said Moody’s.

A day after the short-lived euphoria caused by the Indian government’s ₹25,000 crore bailout package – it is hit by yet another downgrade. Moody’s rating agency changed its outlook on India to ‘negative’ from ‘stable’.

Pun unintended, this must have turned the Prime Minister Narendra Modi moodier than he was. Yesterday, at an industrial summit in Himachal Pradesh, he was complaining that the real estate bailout package did not get the media coverage it deserved.

It won’t help that Moody’s believes that the many measures being taken by the government including reducing corporate tax rate, bailout to shadow banks, merging large Indian banks --- won’t help the slowdown which is ‘deeply entrenched’.

“While government measures to support the economy should help to reduce the depth and duration of India's growth slowdown, prolonged financial stress among rural households, weak job creation, and, more recently, a credit crunch among non-bank financial institutions (NBFIs), have increased the probability of a more entrenched slowdown,” the agency said in its report.

The finance ministry released a statement saying that IMF and other organizations have a positive outlook on the country. “The government has undertaken a series of financial sector and other reforms to strengthen the economy as a whole. Government of India has also taken policy decisions in response to the global slowdown. The measures would lead to a positive outlook on India and would attract capital flows and stimulate investment,” the statement said.

But these many measures are what could alter India’s finances. The many bailout packages that India is rolling out to BSNL and MTNL, shadow banks and many others which are in deep crisis --- could also land the country in debt. Added to that, due to weak sentiment, the government’s plans to sell state-owned companies and make money --- is also not moving at the expected pace.

“With the recently announced corporate tax cuts and lower nominal GDP growth, Moody's now expects a central government deficit of 3.7% of GDP in the fiscal year ending in March 2020. State deficits will likely be at or very close to the 3% of GDP cap. A deeper liquidity squeeze that threatened the solvency of some NBFIs could give rise to some fiscal costs from government support to some institutions,” said Moody’s report.

At this juncture, the ability of the country to afford debt will also come down. It means India is slowly ending up where most of its companies are --- deep in debt, increased costs, weak credit ratings and unsold assets.