Two financial services companies, Moody’s Investors Service and Nomura Holdings, have lowered their outlooks on the Indian economy as they see the current slowdown to be worse than anticipated and don’t expect an early turnaround.

Moody’s Investors Service has cut India’s credit rating outlook to negative, citing a range of problems including a worsening shadow banking crunch, a prolonged slowdown in the economy and rising public debt.

It said the sharp slowdown in growth and a surprise corporate-tax cut will put government finances under pressure this year. Moody’s is projecting a budget deficit of 3.7% of gross domestic product in the year through March 2020, higher than the government’s 3.3% target.

Moody’s retained India’s foreign currency rating at Baa2, the second-lowest investment grade score, but said it could resort to a downgrade if fiscal metrics deteriorate.

India’s growth outlook has weakened sharply this year, with a crunch that started out in the shadow banking industry, following the collapse of Infrastructure Leasing & Financial Services Limited, and then spread to retail businesses, car makers, home sales and heavy industries.

Growth has come down to a six-year low of 5%, with Moody’s saying there’s a low chance of sustained growth at or above 8%.

The rating agency judges that the slowdown is “longer than anticipated” and will stabilize only if there is a growth on a sustained basis, which would help the government raise more taxes and bring down the fiscal deficit.

The downgrade to the outlook puts additional pressure on authorities to kick start Asia’s third largest economy, although they have limited room for doing that. The Reserve Bank of India has already cut interest rates five times this year, though lenders aren’t passing on that easing to customers.

The rating agency said it doesn’t expect the credit crunch among non-banking financial institutions, which were the main source of consumer loans in recent years, to be resolved quickly.

While government measures to support the economy should help reduce the depth and duration of India’s growth slowdown, Moody’s pointed out, prolonged financial stress among rural households, weak job creation and credit crunch among non-bank financial institutions have increased the probability of a more entrenched slowdown.

Nomura’s take

Japanese brokerage Nomura drastically cut its gross domestic product forecast to a low 4.9% for the year from 5.7% earlier, saying India’s economy is going through a “deeper trough” and that even a sub-par recovery is at least a year away.

While there have been a rash of growth estimate cuts, including a 0.70 percentage points reduction by the Reserve Bank of India last month to 6.1%, the Japanese brokerage’s estimate is so far the lowest.

The massive reduction in growth forecast comes amid a slide in GDP growth to a six-year low of 5% for the June quarter and amid high frequency indicators showing a further stress in the growth engine, which may push the Q2 GDP number even lower. However, many bodies including Reserve Bank had been expecting a pick up in the second half.

Nomura analysts were hoping for an uptick in Q3, but now they say it may not happen. They now expect a delayed recovery and a weak pick-up. Nomura acknowledged the steps taken by the government and the RBI to prop growth up, but pointed out that a “clogged credit channel of policy transmission and weak global growth” are major headwinds for the economy now.

It now believes that a pick-up will happen only in FY21. It also forecast a higher fiscal deficit of 3.7% – 40 basis points more than the government target, as no additional revenue stream has been identified to cover up for the massive 1.45 trillion rupees in corporate tax giveaways.

Nomura also called for a closer monitoring of credit and financial stability risks, as it felt that the current tight credit conditions will result in higher bad loans and weaker credit growth.

Downplaying it

Taking note of downgrade by the Moody’s, the Indian Finance Ministry put up a brave face by arguing that the fundamentals of the Indian economy remain robust with inflation under check and bond yields low. “India continues to offer strong prospects of growth in near and medium term,” the finance ministry added.

The government said it had undertaken a series of financial sector and other reforms to strengthen the economy as a whole. It hoped these measures will lead to a positive outlook on India and attract capital flows and stimulate investments.

The ministry also reiterated that India continues to be among the fastest growing major economies in the world.