It was a huge shot in the arm for Modi-government’s reforms on Friday morning, as global rating agency Moody’s Investors Service upgraded India’s local and foreign currency issuer ratings to Baa2 from Baa3 and changed the outlook on the rating to stable from positive. Notably, Moody’s has revised the sovereign rating of India a notch above investment grade after a long gap of 14 years. Moody’s says that the reforms being pushed through by Modi’s government will help stabilize rising levels of debt. This one-level shift from the lowest investment-grade ranking puts India in line with the Philippines and Italy.

Many top market voices and economists welcomed the news, saying that this recognises the efforts of the Modi government, to put India on the path of growth. In an interview to ET Now, Shri Subhash Chandra Garg, Secretary of Department of Economic Affairs said that India Ratings Upgrade is an indication of the work done by the Government in the last 3 years. On similar lines Rakesh Jhunjhunwala pointed out,” More important than the financial implications, is the boost to India’s sentiments.” Similarly, Nimesh Shah of ICICI Prudential Mutual Fund said, “ We have been explaining to people that in the last one or two years, that the macroeconomics is very good. When we are representing the country outside, this is a very good step to portray our ability outside the country.” We take a look four key factors that led to the upgrade.

GST boost

In its report, Moody’s recognised the government’s efforts with regard to the new indirect tax regime of GST. Moody’s said that implementation of the new indirect tax regime has undermined growth over the near term, adding that it expects real GDP growth to moderate to 6.7% in the fiscal year ending in March 2018 (FY2017). Moody’s says that GST will “promote productivity by removing barriers to interstate trade.”

PSU bank reform

After the Narendra Modi-led government announced a mega plan of Rs 2.11 lakh crore to recapitalise the stressed public sector banks last month, Moody’s recognised that “measures to address the overhang of non-performing loans (NPLs) in the banking system,” saying it will advance the government’s objective of improving the business climate. In an interview to Livemint, Deepak Parekh, Chairman of HDFC said, “This is an Indian TARP (Troubled Assets Relief Programme) and it has done well because this Rs 2.11 trillion is a two-year thing. So the government has taken care of not just current NPAs but 5-10% that may come up.This is a big bang reform. The equity they put in will increase value for them.”

Aadhar-UID

The global rating firm also credited government’s efforts in the Aadhaar system of biometric accounts and targeted delivery of benefits through the Direct Benefit Transfer (DBT) system which will lead to “reduction of informality in the economy.” In a recent report Morgan Stanley had observed, that the Indian government’s effort to ensure that almost every household has a bank account via the Jan-Dhan Yojana combined with the Aadhaar unique identification programme and mobile connectivity, would propel India’s digital leap.

Demonetisation

“Moody’s believes that those (reforms) implemented to date will advance the government’s objective of improving the business climate, enhancing productivity, stimulating foreign and domestic investment, and ultimately fostering strong and sustainable growth. The reform program will thus complement the existing shock-absorbance capacity provided by India’s strong growth potential and improving global competitiveness,” Moody’s said adding that, “Most of these measures will take time for their impact to be seen, and some, such as the GST and demonetization, have undermined growth over the near term.” Decoding the costs and benefits associated with the reform, Sajjid Z Chinoy,  Chief India Economist at JP Morgan Chase told Indian Express yesterday that note-ban had a short-term cost but there will be medium-term benefits.