After Moody’s India upgrade, rating agency rushes to justify move; see reasons why

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New Delhi | Published: November 22, 2017 5:32:15 AM

While measures like demonetisation and the GST have undermined near-term growth, as “disruption fades, we expect to see a rebound in real and nominal GDP growth to sustained higher levels”, it said.

Says recent reforms to enhance country’s structural credit strength.

Global rating agency Moody’s on Tuesday justified its upgrade of India’s sovereign rating by a notch after a gap of almost 14 years, despite an economic slowdown in recent quarters and an expected rise in debt levels. It said the move was based on its assessment that a number of reforms by the Narendra Modi government will combine to enhance the country’s structural credit strengths, including its strong growth potential, improving global competitiveness and its large and stable financing base for government debt. Moody’s said while it has factored in risks to near-term growth by trimming its GDP expansion forecast for India to 6.7% for 2017-18 (from 7.1% last fiscal), the economy’s growth potential remains robust and stronger than most peers. Moody’s predicts a rebound in India’s growth to 7.5% in 2018-19. “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,” it said in an answer sheet containing published frequently asked questions on the drivers of the sovereign rating upgrade and the implications for other Indian issuers. The justification came amid criticism by some Opposition leaders. Former Prime Minister Manmohan Singh said the government shouldn’t be lured into believing that the economy has turned the corner. Last week, Moody’s raised India’s sovereign rating by a notch to Baa2 from the lowest investment-grade ranking of Baa3 and improved its rating outlook to stable from positive.

While measures like demonetisation and the GST have undermined near-term growth, as “disruption fades, we expect to see a rebound in real and nominal GDP growth to sustained higher levels”, it 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. On how it factored in demonetisation and the GST into its rating decision, Moody’s said while the note ban should “help reduce tax avoidance and corruption”, over time, the GST will “contribute to productivity gains and higher GDP growth”. GST will lead to improved tax compliance and administration.

As for the reason for the rating upgrade when India’s debt-to-GDP ratio is expected to rise, Moody’s said: “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 expects India’s debt-to-GDP ratio to inch up by around one percentage point in 2017-18 to 69% of GDP, as nominal GDP growth has slowed following the note ban and the GST launch. Although India’s general government debt burden is higher than some of its emerging market peers, its liabilties have dropped from 83.20% in 2003-04 to 68.56% last fiscal. However, as has been pointed out repeatedly by chief economic advisor Arvind Subramanian, India’s sovereign rating is still much lower than peers’, including China’s, despite much better macro-economic fundamentals. Moody’s also termed the government’s massive Rs 2.11 lakh-crore plan for recapitalisation of public-sector banks “credit positive”. “While the capital injection will modestly increase the government’s debt burden (by about 0.8% of GDP), it should enable banks to move forward with the resolution of NPLs through comprehensive writedowns of impaired loans and gradually increase lending. “Over the medium term, if met by rising demand for investment and loans, this will help foster more robust growth and support fiscal consolidation,” it said.

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