Getting a ratings upgrade will require a lot more work
For a government under attack for not doing enough to get investment back on track, credit-rating agency Moody’s outlook upgrade is a shot in the arm. More so since, from the credit rating agency point of view, this ends the overhang of the UPA’s poor performance. In April 2012, while Moody’s had held on to its ‘stable’ outlook, fellow rating agency S&P had lowered India’s outlook to ‘negative’ and had threatened a ratings downgrade if India did not get its act together. At that point, India’s CPI was running at 10.3%, current account deficit (CAD) at 4.5% of GDP and FY12 fiscal deficit at 5.7% of GDP. While it is true global investors don’t always pay attention to what rating agencies have to say—not surprising, given their track record—putting India at below investment-grade would have affected the ability of several funds to invest in Indian paper. S&P changed its outlook to stable in September 2014, after the new government came to power and things looked like they may improve.
Given the dramatic improvement in India’s macros over the past few quarters, largely due to the improved global environment though, Moody’s change in outlook to ‘positive’ is not surprising. CPI inflation has been reducing steadily over the past year and is currently at 5.4%. While several economists argue that a monetary policy framework focussed on inflation control is not in India’s best interests, credit rating agencies view it as a positive. Thanks to the collapse in global commodity prices, the CAD is 1.6% of GDP. The commodity price collapse has helped lower energy subsidies and has allowed the government to decontrol diesel prices—all subsidies, including on food-grains, though still high in absolute terms, are down from 2.24% of GDP in FY14 to a projected 1.73% in FY16. And thanks to the US economy looking much better, gold prices have collapsed, easing the pressure on the CAD. With most countries in trouble, India looks a better bet today, which is why FII flows have been rising even though economic growth has yet to show a meaningful pick-up.
Moving from an outlook upgrade to a ratings upgrade will require a lot more effort. Moody’s press statement talks of how the banking system’s asset quality remains relatively weak and, combined with the excess leverage of top Indian corporates, especially in the infrastructure space, this puts a definite ceiling to how fast India can grow. While the government remains committed to reforms, progress on the ground needs to be seen. The land Bill remains in rough waters due to the government’s minority in the Rajya Sabha, and there has been limited action on the ground on cutting food subsidies or in getting the policy environment right in sectors like telecom and oil/gas. Some important policy steps have been taken in the mining sector, but this has to translate into commercial miners getting licenses and the lack of progress on raising electricity tariffs means investments here will continue to remain troubled.