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Moody's Downgrades India's Outlook to Negative, Businesses Feel the Heat Although the ratings agency expects government measures to provide support to the economy, they are unlikely to restore growth to previous levels

By Debroop Roy

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In yet another blow to the country's economic prospects, ratings agency Moody's cut India's outlook to negative from stable, citing increasing risks that could keep the economy from growing at a faster rate.

The Indian economy saw growth of 5 per cent in the quarter ended June, from a year earlier, the slowest in six years, highlighting falling consumer demand.

"If nominal GDP growth does not return to high rates, Moody's expects that the government will face very significant constraints in narrowing the general government budget deficit and preventing a rise in the debt burden," Moody's said in its report. Moody's was the only major rating agencies - the others being Fitch and S&P - to upgrade its ratings for India in 2017.

This hit to the economy has been felt across business sectors, with multiple companies posting tepid results and some warning that things could go from bad to worse.

FMCG to Auto

Earlier this week, fast moving consumer goods (FMCG) company Dabur warned that its domestic unit continued to face challenges.

"The domestic business continues to face heavy headwinds in the form of a sustained slowdown in demand, aggravated by the liquidity crunch in the market," Dabur's chief executive officer Mohit Malhotra said.

Dabur's warning came days after the country's largest consumer goods company Hindustan Unilever reported flat volume growth in the second quarter. The owner of popular brands such as Surf Excel and Kissan said it expects demand to remain under pressure, especially in the rural areas.

The concerns over demand were also mentioned by FMCG major Marico. "The company had a soft second quarter in the face of a challenging liquidity and consumption environment in the domestic market, especially in rural (areas)," Mumbai-based Marico had said in its second-quarter earnings release.

The auto sector is among the worst hit. India's largest carmaker Maruti Suzuki reported its biggest fall in quarterly profit in eight years in the second quarter. Japan's Suzuki Motor Corp, the parent company of Maruti Suzuki, said it was no longer enthusiastic about the country's auto market.

US-based Ford too would sell a majority stake in its India arm to Mahindra & Mahindra, after two decades of operating independently.

The NBFC Troubles

India's shadow banking sector has been hit hard in recent times, with several of these non-banking financial institutions facing a severe liquidity crunch. This has led to fears of a full-blown crisis in the sector.

These lenders have come under pressure since a series of defaults by IL&FS last year. The IL&FS incident forced the government to intervene, reflecting weakness in the sector.

A crisis for NBFCs could cast a cloud of trouble over the entire economy as these lenders have continued to lend at a higher pace than traditional banks. The Economic Times reported in August that loan growth for NBFCs had gone into negative, with de-growth of nearly 2 per cent in the second quarter, citing an analysis by Credit Suisse.

Moody's report too highlighted this fact, stating this credit crunch as one of the factors that has "increased the probability of a more entrenched slowdown."

The agency said it does not expect the credit crunch to be resolved quickly.

Government's Response To Bear Fruit?

The country's central bank has cut the policy rate repeatedly this year, while the government has announced support for farmers and low-income households, among others.

"Although Moody's expects these measures to provide support to the economy, they are unlikely to restore productivity and real GDP growth to previous rates," the report said.

Analysts at Nomura Securities said they agreed with Moody's observations and lowered their GDP growth projections to 4.9 per cent from 5.7 per cent in 2019 and to 6 per cent from 6.9 per cent in 2020.

They also expect weak growth to result in a fiscal deficit slip in 2020 and 2021, and see a further rate cut from RBI by mid-2020.

"However, we do expect the government to persist with its focus on structural reforms to improve the investment climate and to attract more capital inflows into India," Nomura's note said.

Corporations' Ratings Outlook Cut

Moody's has also downgraded the ratings of several Indian corporations including Infosys and Hindustan Petroleum following the country's outlook cut.

The other names are: Bharat Petroleum, Indian Oil, Oil and Natural Gas Corp, Oil India, Petronet LNG and Tata Consultancy Services

"The negative outlook reflects that Moody's will downgrade the ratings of these companies if Moody's downgrades the rating of India sovereign to Baa3 from Baa2," the ratings agency said.

Other than these corporations, it also cut outlook for a number of infrastructure-related companies namely, NTPC, NTPL, National Highways Authority of India, Gail (India), Power Grid Corp of India, Adani Green Energy Restricted Group and Adani Transmission Restricted Group.

Debroop Roy

Former Correspondent

Covering the start-up ecosystem in and around Bangalore. Formerly an energy reporter at Reuters. A film, cricket buff who also writes fiction on weekends.
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