Citing reforms that lift growth, Moody’s upgrades India first time since 2004

New Delhi: Global credit rating agency Moody’s Investors Services on November 17 upgraded India’s sovereign ratings to Baa2 from its lowest investment grade Baa3, citing the NDA government’s “wide-ranging program of economic and institutional reforms” among the reasons for the move.
The ratings upgrade by Moody’s, its first for India since 2004, was accompanied by a change in the outlook for India’s rating to ‘stable’ from “positive.” The markets including stocks, bonds and rupee rallied on the ratings upgrade.
The upgrade is underpinned on the expectation that continued economic and institutional reforms will over time enhance India’s high growth potential and are likely to contribute to a gradual decline in the government debt burden over the medium term. The US-based rating agency, however, warned that India’s rating could be downgraded if its fiscal metrics and the outlook for general government fiscal consolidation deteriorates materially.
A sovereign ratings is reflective of a country’s risk profile and a ratings upgrade would enhance India’s position as an investment destination for foreign investors. The move is also expected to be a positive for bond yields and would result in a reduction in the cost of raising capital for the government and financial institutions.
The one-level step-up from the lowest investment-grade ranking puts India in the league of the Philippines and Italy and comes within weeks of a 30-place improvement in India’s ranking in World Bank’s ease of doing business ranking to 100th rank.
Terming the upgrade by Moody’s as a “belated recognition of all the positive steps taken in India in last few years”, Finance Minister Arun Jaitley said that this is not something which has happened in isolation but a result of the reforms roadmap being followed by the government.
“We believe that it is a belated recognition of all the positive steps which have been taken in India in the last few years which has contributed to the strengthening of the Indian economy. Obviously, it is a recognition and an endorsement of the reform process that has gone on in India particularly in last 3-4 years where a number of structural reforms have taken place which has placed India on a path of high trajectory growth. It’s also a recognition of the fact that India continues to follow a path of fiscal prudence that has brought stability to the Indian economy,” Jaitley said.
The finance minister added: “If you look at the big picture for three years in a row India is the fastest growing amongst the major economies. India is one of the few economies undertaking structural reforms. I’m sure that many who had doubts in their minds about India’s reform process would now seriously introspect on their own positions itself,” he said.
“Moody’s believes that the @narendramodi Government’s reforms will improve business climate, enhance productivity, stimulate foreign and domestic investment, and ultimately foster strong and sustainable growth,” PMO India tweeted.
India’s sovereign credit rating was last upgraded by Moody’s in January 2004 to Baa3 from Ba1. In 2015, it had changed rating outlook to “positive” from “stable.” Baa3 rating is just a notch above ‘junk’ status.
“The rating could also face downward pressure if the health of the banking system deteriorated significantly or external vulnerability increased sharply,” it said. The other two major global rating agencies, Standard and Poor’s and Fitch Ratings, have assigned India lowest investment grade rating with stable outlook.
In its ratings upgrade, Moody’s has considered reforms including improvements to the monetary policy framework, measures to address the issue of non-performing loans in the banking system, and measures such as demonetization, Aadhaarsystem of biometric accounts and targeted delivery of benefits through the Direct Benefit Transfer (DBT) system intended to reduce informality in the economy.
The agency also acknowledged the recently introduced Goods and Services Tax (GST), which among other things, will promote productivity by removing barriers to interstate trade, Moody’s said.
“The government is mid-way through a wide-ranging program of economic and institutional reforms. While a number of important reforms remain at the design phase, Moody’s believes that those 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,” it said.
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, it said adding that adoption of a new Fiscal Responsibility and Budget Management (FRBM) Act is expected to enhance India’s fiscal policy framework and strengthen policy credibility on the fiscal front.
Moody’s is also of the view that recent reforms offer greater confidence that the high level of public indebtedness, which is India’s principal credit weakness, will remain stable, even in the event of shocks, and will ultimately decline.
“The impact of the high debt load is already mitigated somewhat by the large pool of private savings available to finance government debt,” Moody’s said.
The relatively fast pace of growth in incomes will continue to bolster the economy’s shock absorption capacity, Moody’s said. Stable financing will mitigate the risk of a sharp deterioration in fiscal metrics, even in periods of relatively slower growth, it said.
India’s ratings could improve further if there is a material strengthening in fiscal metrics, combined with a strong and durable recovery of the investment cycle, supported by significant economic and institutional reforms, Moody’s said. A sizeable and sustained reduction in the general government debt burden, through increased government revenues combined with a reduction in expenditures, along with implementation of key pending reforms, including land and labor reforms would help India to upgrade its sovereign rating, it said.
On the future path of reforms, Jaitley said that now the emphasis would be on implementation of reform measures. “I think there will be an important emphasis now also on implementation and on reaping the benefits of the growth process. In terms of expenditure, emphasis on infrastructure building, which is already on, a lot of expenditure into rural areas to improve quality of life there. These are all amongst the steps which have already been indicated by the government,” Jaitley said.
When asked about the timing of the ratings upgrade close to elections, Jaitley said, “We do not want to link this to elections because elections happen 3-4 times in this country every year. And that’s why if we link it to elections, then stable reforms will not be possible, there will be only election-oriented decisions.”
Union Railway Minister Piyush Goyal said the government will stay on the path of good governance and focus on effective delivery to people. The government “is going to do what it has to do on the domestic front — employment growth, economic growth, reviving investment,” said Chief Economic Advisor Arvind Subramanian. Economic Affairs Secretary Subhash Chandra Garg said the upgrade has recognized government efforts on fiscal deficit, consolidation and debt control.

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