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The credit rating firm flagged risks of populist policies due to the rise in political tensions.
In a research report, the US-based rating agency said bureaucracy could slow approval processes in obtaining licences and setting up businesses, prolonging project gestation.
The sovereign rating by Moody's stands at 'Baa3' -- which is the lowest investment grade, just a notch above junk status.
Moody's said the economic costs of coronavirus crisis amid the near shutdown of the global economy are accumulating rapidly.
In its Global Macro Outlook 2020-21, Moody's said India is likely to see a sharp fall in incomes at the estimated 2.5 per cent growth rate, further weighing on domestic demand and the pace of recovery in 2021.
The lowering of outlook will put additional pressure on Finance Minister Nirmala Sitharaman to take more measures to kickstart the economy.
The GDP growth forecast for 2019 calendar year was revised downwards from its previous estimation of 6.8 per cent.