While Moody’s India sovereign rating upgrade after nearly 14 years came as a big boost to Prime Minister Narendra Modi, its timing has been questioned by many, and it is being widely speculated that the two other — Fitch and S&P — of the ‘Big Three credit rating agencies’ may not follow suit. As the move is being criticised both domestically and globally as ‘premature‘, Moody’s has explained why and how India moved one notch above on the rating scale.
Moody’s published detailed answers of frequently asked questions, in which the ratings agency said that even as some reforms remain at the design stage, those implemented to date will support India’s strong growth potential and help improve global competitiveness to enhance the economy’s shock absorption capacity. “It will take time for the impact of most of the measures to be seen. Some, such as the GST and demonetization, have undermined near-term growth. However, as disruption fades, we expect to see a rebound in real and nominal GDP growth to sustained higher levels,” Moody’s said while answering what were the drivers of the upgrade to Baa2.
Moody’s said that it has upgraded India’s rating despite the current macroeconomic slowdown taking into account economy’s growth potential, which is strong and stronger than most peers. “Combined with a large and diversified economy and improving global competitiveness, this boosts economic strength, our view of an economy’s shock absorption capacity, which we assess as ‘High (+)’, the fourth-highest score on our 15-rung sovereign factor score scale,” Moody’s said.
“In turn, sustained high nominal GDP growth will likely contribute to a gradual decline in the general government debt burden
over the medium term. Overall, recent reforms, combined with India’s structural strength, offer greater confidence that the high level of public indebtedness, which is India’s principal credit weakness, will not rise materially even in potential downside scenarios and will eventually decline gradually,” Moody’s added.
Moody’s said that the biggest element that helped in India upgrade has been the implementation of the GST, which will promote productivity by removing barriers to interstate trade. “The GST’s impact on government tax revenue and the broader economy will stem from potential changes in corporate decisions with regards to production, pricing and tax compliance. One of the largest benefits of the GST is the removal of an inefficient web of taxes at both the state and national levels, including border taxes for the transport of goods across state lines, which fragmented the national market. Over time, the GST will contribute to productivity gains and higher GDP growth by improving the ease of doing business, unifying the national market and enhancing India’s attractiveness as a foreign investment destination,” Moody’s said.
While Moody’s dedicated 3-4 sentences in explaining benefits of other reforms, demonetisation was answered in just one line: Demonetization should also help reduce tax avoidance and corruption.
Moody’s also explained in detail some other reforms incorporated by India such as Aadhaar, Insolvency and Bankruptcy Code, banking reforms through recapitalisation et al.
Moody’s raised India’s sovereign credit rating by one notch to Baa2 from the lowest investment grade of Baa3, saying that the reforms being pushed through by Narendra Modi’s government will help stabilise rising levels of debt. However, concerned over the rise in international oil prices and fiscal slippages, the other two — Fitch and S&P — of the ‘Big Three credit rating agencies’ are not likely to upgrade India’s ratings.
Sue Trinh, head of Asia foreign-exchange strategy at RBC Capital Markets in Hong Kong questioned the timing of the upgradation, saying that it has come at a time when crude oil prices are rising and concern over fiscal slippages is seen making matters worse policymakers already grappling with slowing economic growth. “The timing is a surprise given concerns regarding the fiscal metrics right now,” said Sue Trinh.