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  1. Caution: Moody’s India upgrade welcome but here’s what could move the rating down

Caution: Moody’s India upgrade welcome but here’s what could move the rating down

While Moody’s first upgrade of India’s sovereign credit rating in 14 years to a notch above the lowest investment grade -- Baa2 -- is welcome, it makes the government’s job even harder. For, the rating upgrade doesn’t come without a warning label.

By: | Published: November 18, 2017 1:21 PM
India’s credit rating upgrade doesn’t come without warning. If India’s fiscal situation takes a turn for the worse, the credit rating may take a hit. (Image: Reuters)

It’s jubilation all over for Prime Minister Narendra Modi, Finance Minister Arun Jaitley and their Bharatiya Janata Party at large, with a little brooding from the usual quarters — the opposition, including the Left and Congress. Indeed, Moody’s first upgrade of India’s sovereign credit rating in 14 years to a notch above the lowest investment grade — Baa2 — is most welcome. It is a ringing endorsement of Narendra Modi’s economic policies and transformative reforms that the opposition has been drumming up as being messy and disruptive for over a year now.

Be it secretive demonetisation, hurriedly-implemented GST, privacy and safety concern evoking biometric linking programme, bankruptcy rules, bank recapitalisation, or any such, all have got a thumbs up from Moody’s in its upgrade of India’s sovereign issuer rating to its highest ever.

Yet, on another level, it makes the government’s job even harder. For, the rating upgrade doesn’t come without a warning label. If India’s fiscal situation takes a turn for the worse, all those transformative reforms notwithstanding, the credit rating may take a hit and may slide back to where it was.

“A material deterioration in fiscal metrics and the outlook for general government fiscal consolidation would put negative pressure on the rating,” Moody’s Investors Service said on Friday, along with the announcement to upgrade the credit rating. “The rating could also face downward pressure if the health of the banking system deteriorated significantly or external vulnerability increased sharply,” Moody’s added in the statement.

Fiscal prudence

This means that Finance Minister Jaitley, who was toying with the idea of taking some liberty with budget goals and fiscal prudence as recently as Thursday, has lesser room to wriggle out of the government’s fiscal deficit commitment. On Thursday, the government was talking about easing its budget goals as sweeping policy changes hurt growth and revenue, Bloomberg news reported.

“Challenges arising from structural reforms could change the glide path,” Bloomberg news quoted Arun Jaitley as telling investors in Singapore on Thursday. He was referring to the plan to limit fiscal deficit to 3.2% of GDP in the current financial year 2017-18, and to a 10-year low of 3% in the next year 2018-19.

That flexibility has evaporated now, if Modi-Jaitley duo wants to continue to boast about the rating upgrade, for which this government, and even the previous one, lobbied very hard all through the years. “We’ll continue to maintain the glide path,” Arun Jaitley said at on Friday in just about a u-turn to his Thursday’s statement. “The upgrade is a recognition of the fact that India continues to follow a path of fiscal prudence.”

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