"Prolonged softer growth will dampen prospects for the government's fiscal consolidation plans and hamper its ability to prevent a rise in the debt burden," it said in a report released on Thursday. "Given India's already weak fiscal position, this will weigh on the sovereign credit profile."
At 5 per cent year-on-year in the April to June quarter, India's real GDP growth has slowed markedly. The drivers of the deceleration are multiple, mainly domestic and in part long-lasting. What was an investment-led slowdown has broadened into consumption, driven by financial stress among rural households and weak job creation.
A credit crunch among non-bank financial institutions (NBFIs), major providers of retail loans in recent years, has compounded the problem. "While we expect a moderate pick-up in real GDP growth and inflation over the next two years supported by monetary and fiscal stimulus, we have revised down our projections for both," said Moody's.
"We forecast real GDP growth to decline to 5.8 per cent in the fiscal year ending in March 2020 (fiscal 2019) from 6.8 per cent in fiscal 2018, and to pick up to 6.6 per cent in fiscal 2020 and around 7 per cent over the medium term. Compared with only two years ago, the probability of sustained real GDP growth at or above 8 per cent has significantly diminished."
The fiscal year ending in March 2020 is internally considered by Moody's as fiscal 2019.
With the recently announced corporate tax cuts and lower nominal GDP growth, Moody's now expects a central government deficit of 3.7 per cent of GDP in fiscal 2019, marking a 0.4 percentage point slippage from its target.
A prolonged period of slower nominal GDP growth not only constrains the scope for fiscal consolidation but also keeps the government debt burden higher for longer compared with previous expectations.
Based on a debt sensitivity analysis, under nominal growth of around 11 per cent, the debt burden will remain broadly stable at around 68 per cent of GDP in the next few years and decline slightly toward 66 per cent by 2023.
"However, we continue to see a low probability of a significant and rapid deterioration in fiscal strength -- India's main credit constraint -- given the resilience to financing shocks offered by the composition of government debt," said Moody's.