India could be headed for debt trap and recessionar y phase: Moody's

Global ratings agency, Moody's Investors Service has cut India's outlook to ne gative fr om stable on i ncreasing r isks o f lower econo mic g rowth t han the past and r eflecting lo wer government effectiveness at addressing long-standing economic and institutional weaknesses. Moody's has changed the outlook on the Government of I ndia's ra tings to ne gative from sta ble and af firmed the Baa 2 foreign-currency and loc al c urrency long-term issuer ratings. Moody's also affirmed India's Baa2 local- currency sen - ior un secured rating a nd it s P-2 other short-term local-currenc y rating. India's credit rating at Baa2 is the second lowest in vestment ra ting and Mo ody's has war ned that India could be heading for a debt trap and recessionary phase. Moody's would likely downgrade India's ratings if its fiscal metrics were increasingly lik ely to w eaken ma terially. T his would probably happen in the context of a prolonged or de ep slo wdown in growth, with only limited prospects that the government would be able to restore stronger g rowth through economic and institutional refor ms

Moody's has painte d a g rim pict ure o f the eco nomy p ointing to r ural st ress, weak job cr eation and NBF C liquidit y crunch as t he r easons f or a more pr olonged slowdown in the economy. "While government measures to support the econom y should help t o re duce t he depth an d dura tion of In dia's g rowth slowdown, pr olonged fin ancial str ess among r ural ho useholds, weak job cr eation, and, more recentl y, a credit crunch among non-ba nk financi al inst itutions (NBFIs), have increased the probability of a mor e ent renched slo wdown," Moody's said.

The rating a gency is also very cautious about future reform moves as the scope has diminished and options h ave b e e n reduced.