It’s been more than a year since Narendra Modi led government announced demonetisation, and global credit rating agency Moody’s Investors Service recognised its impact saying that such reforms will continue to strengthen India’s institutional reform. “Government efforts to reduce corruption, formalize economic activity and improve tax collection and administration, including through demonetization and GST, both illustrate and should contribute to the further strengthening of India’s institutions,” said Moody’s in its report. The firm noted, “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.” In fact many market voices had pointed out note-ban while bringing short-term pain will eventually lead to longer-term benefits. 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.
Notably, 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. 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.
Apart from demonetisation and GST, Moody’s also recognised government’s efforts relating to PSU reform and Aadhar-UID. The global rating firm credited 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.” Further, 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.
“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,” noted the global firm.