Economy

Economy gets thumbs-up from Moody’s

PSU banks can now consider accessing market to raise capital. Reuters  

Global credit rating agency Moody’s Investors Services raised India’s sovereign rating for the first time in 13 years early on Friday morning (India time), citing the country’s high growth potential in the years to come, thanks to economic and institutional reforms.

“The decision to upgrade the ratings is underpinned by Moody’s expectation that continued progress on economic and institutional reforms will, over time, enhance India’s high growth potential and its large and stable financing base for government debt, and will likely contribute to a gradual decline in the general government debt burden over the medium term,” the agency said in a statement, upgrading the Indian government’s rating as a local and foreign currency issuer from Baa3 with a positive outlook to Baa2 with a stable outlook.

Borrowing obligations rated Baa2 are subject to moderate credit risk. They are considered medium grade and as such may possess certain speculative characteristics. Baa3, by contrast, was the lowest investment grade rating.

A rebuttal to critics

For the government, the upgrade serves as a strong rebuttal for critics who have panned its handling of the economy — coming on the back of India’s rise in the World Bank’s ease of doing business index, and as a culmination of persistent efforts to get rating agencies to acknowledge India’s improved macroeconomic situation.

The financial markets reacted positively to the development, with the BSE Sensex rising 236 points and the rupee rising to ₹64.62 per dollar before closing at ₹65.02 per dollar, up 0.47% from Thursday’s level.

Economy gets thumbs-up from Moody’s
 

Acknowledging that some steps such as the GST and demonetisation have ‘undermined’ growth in the near term as reflected by the slower GDP growth of 5.7% in the first quarter of 2017-18, Moody’s said it expects real GDP growth in India to moderate to 6.7% in this fiscal year. But the agency believes that the disruption effect of these reforms will fade as the government helps small and medium enterprises and exporters with compliance issues under the new indirect tax regime and growth will rise to 7.5% in 2018-19, and remain robust, thereafter.

Higher growth potential

“Longer term, India’s growth potential is significantly higher than most other Baa-rated sovereigns,” the agency said.

 

“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,” it noted.

Asked if a slippage on the fiscal deficit targets for this year could trigger a review of the rating, William Foster, vice-president, Sovereign Risk Group at Moody’s Investors Services, said the stable outlook denotes that “we do not expect a rating change in the foreseeable future.”

“We forecast the general government budget deficit at 6.5% of GDP this fiscal year, similar to the last two fiscal years. Lower government revenues than planned in the budget and somewhat higher government spending could lead to a deficit somewhat wider than targeted. However, we think that the government’s commitment to fiscal consolidation remains,” Mr. Foster told The Hindu, asserting that steps taken to broaden the tax base and improve the efficiency of government spending will contribute to a gradual narrowing of the deficit over time.

 

Although the rating agency agreed that a lot remains to be done such as fixing the GST’s implementation challenges, weak private sector investment and the slow resolution of banks’ bad loans, Moody’s said it expects at least some of these issues to be addressed over time and will help further improve the Indian government’s effectiveness and overall institutional framework.

Basing its upgrade on the sustainable growth that reforms will trigger and the greater stability in government debt going forward, the agency also flagged the need for acting on other important fronts ‘which have yet to reach fruition’ such as planned land and labour market reforms


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Printable version | Sep 29, 2021 7:52:56 AM | https://www.thehindu.com/business/Economy/economy-gets-moodys-thumbs-up/article20547052.ece

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