Moody’s has said a strong and durable recovery of the investment cycle as well as long-delayed land and labour market reforms could put upward pressure on its India rating, an assessment the domestic analysts and industry leaders endorsed even as they called for a fast-tracking of the sales of government stakes in public sector banks and PSUs to strengthen the fisc. “Follow-up measures needed to maintain +ve rating trend (by) further simplification of GST [goods and services tax] (structure & bureaucratic) and return to declining fiscal deficit trend (by public sector bank and PSU sale in booming market),” former chief economic adviser Arvind Virmani said in a tweet. While Moody’s has raised India to Baa2 from the lowest investment grade ranking of Baa3, Standard & Poor’s and Fitch have so far kept the country at BBB-, which corresponds to Baa3. “While ratings are backward looking indicator, the timing of the upgrade is forward looking in nature, given the implementation risks on some of the key reforms, particularly GST and bank recapitalisation. Other rating agencies are likely to follow suit but may wait until the announcement of next year’s Budget or later,” said Gaurav Kapur, chief economist at IndusInd Bank. However, most analysts feel that India deserved the rating upgrade much earlier. “It was long overdue and I always feel rating agencies have not been fair on India. In the last one, one and a half years we have seen a number of transformational reforms, not incremental reforms, and have been well executed by the government, and on these grounds they should have done the upgrade much earlier,” said Deepak Parekh, HDFC chairman. He said with Moody’s latest action, cost of capital will come down, but added that “if we see the way the oil is going there is lot of uncertainty in the Opec countries”.
Given India’s robust forex reserves of $400 billion, it is better prepared to a situation where oil price plunges to levels of $70-75 per barrel, but oil climbing to $100-115 would be a huge negative for the country. In the near-term, India sees a modest weakening of its government debt, but expects the situation to improve soon thereafter. Economic affairs secretary Subhas Chandra Garg said: “They (rating agency) are projecting a little rise in the (debt) trajectory going forward, so they are conscious of the real dynamics of the debt situation. We, of course, remain committed to the fiscal path.” “The move is overall positive for bonds which were caught in a negative spiral. This is a structural positive which would lead to easing in yields across tenors,” said Lakshmi Iyer, head of fixed income at Kotak Mutual Fund said. Vivek Rajpal, a rates strategist at Nomura Holdings in Singapore, said: “This is a positive surprise to the markets, especially in terms of timing… One fear that was developing in the market was debt-flow positioning.”
According to the NK Singh panel report, while the Centre’s debt-to-GDP ratio was 49.4% in 2016-17, that of states stood at 21%. The country’s average general government debt is as much as 28 percentage points higher than similarly-rated emerging market peers, the report said. Also, the recent massive `2.11-lakh-crore bank recapitalisation plan is supposed to raise the country’s debt level. Moody’s noted most of the measures will take time for their impact to be felt, while some — such as GST and demonetisation — have undermined growth in the near term. Moody’s has already predicted GDP growth of 6.7% for 2017-18, with a pick-up to 7.5% in the next fiscal and similarly robust levels from 2019 onward.
Already, India jumped an unprecedented 30 notches in the latest World Bank ranking on ease of doing business, grabbing the 100th position among 190 nations. Pew Research Center has said Prime Minister Modi remains the most popular leader and that public confidence in the economy and the overall direction have improved. Moody’s said the rating could be raised further if “there were to be a material strengthening in fiscal metrics, combined with a strong and durable recovery of the investment cycle, probably supported by significant economic and institutional reforms”, especially a sizeable and sustained cut in the general government debt burden. However, deterioration in fiscal metrics and any worsening of the health of the banking system would put negative pressure on the rating.