Stronger fundamentals

After a hiatus of over 13 years, top intertiol credit rating agency Moody’s has some good words to say about India, but these are being lost in the cacophony of electoral politics here. In January 2004, Moody’s had upgraded India’s ratings from Ba1 to Baa3; now in November 2017, India has been put another notch higher at Baa2, while the rating outlook has been changed from ‘stable’ to ‘positive’. As for growth, Moody’s upgrade forecasts that the Indian economy will do significantly better from next fiscal onwards — the country’s GDP is projected to grow at 7.5% in 2018-19 (up from 6.7% presently) and maintain “robust” rates thereafter. Last month, the Intertiol Monetary Fund (IMF) too was gung-ho about India, even as it slashed growth rate forecast this fiscal to 6.7% due to demonetisation and GST rollout after-shocks. Overall, the IMF was optimistic about India’s medium-term growth prospects, with its October 2017 World Economic Outlook report saying: “GST promises the unification of India’s vast domestic market, and is among several key structural reforms under implementation that are expected to help push growth above 8 percent in the medium term”. This was followed by World Bank’s Ease of Doing Business ranking list in 2018, in which India made a 30-place jump to rank 100th. With Moody’s rating upgrade now, the stock markets are witnessing an upsurge on expectations of easier access to intertiol credit, reduced borrowing costs for government and Indian corporate, freeing up of additiol domestic capital and higher foreign investment. However, the positive market sentiment in the country has not spilled over into its politics, with high voltage electoral tussles coming up in Gujarat and Himachal Pradesh this year, as well as key States like Kartaka, Madhya Pradesh and Rajasthan up for grabs next year. It thus comes as no surprise that Opposition parties have been quick to dismiss Moody’s upgrade, while the NDA government has determinedly seized upon it as vindication for its policies and phased structural reforms.

Interestingly, while Opposition parties have been observing a series of protests to mark the first year of demonetisation and Congress vice president Rahul Gandhi has derided Goods and Services Tax (GST) as “Gabbar Singh Tax” for supposedly looting small businesses and artisans, both these issues were viewed very differently by Moody’s. Its report has categorically stated that demonetization should help “reduce tax avoidance and corruption”. Lauding the rollout of GST to remove the earlier inefficient web of taxes and fragmented market, Moody’s goes on to say: “Over time, GST will contribute to productivity gains and higher GDP growth by improving the ease of doing business, unifying the tiol market and enhancing India’s attractiveness as a foreign investment destition”. Questions have been raised as to how Moody’s arrived at its optimistic view regarding the Indian economy, whether its upgrade is premature considering that India’s growth rate is down steeply while its debt-to-GDP ratio is on the rise. To justify its projections, Moody’s has argued that structural reforms in an economy that is large and diversified, along with improving global competitiveness — have boosted India’s economic strength and given it “high” shock absorption capacity. As for growth rate crawling to 5.7% in the first quarter of 2017-18, following 6.1% in the preceding quarter, Moody’s take is that the slowdown reflects “temporary impact of demonetization and destocking of inventory in advance of implementation of GST in July”. The country’s government debt-to-GDP ratio is 68% presently, with 22% of government revenue used for interest payout alone. While agreeing that this high level of public indebtedness is India’s principal credit weakness, Moody’s has pinned faith on recent structural reforms and initiatives to improve fiscal transparency and accountability. This has prompted Union Fince Minister Arun Jaitley to bat for demonetisation to be among a series of steps for “formalising and digitalising” the Indian economy, GST as a landmark reform in the country’s indirect tax structure, along with efforts to reduce government deficits, re-capitalise public sector banks, control inflation and ensure overall macro-economic stability. It remains to be seen whether the other two big intertiol credit rating agencies Fitch and S&P share Moody’s positive outlook on India, with some experts flagging India’s fiscal slippages and high oil import bill due to rising crude prices. Political observers however believe that coming assembly election outcomes will determine whether the rendra Modi government will push ahead on more promised reforms or play safe till 2019. A return to populist policies will be a pity, for the country has much at stake in overhauling of its economy, skilling its youth and giving them jobs, enhancing productivity and bringing about inclusive growth. The gains made painfully so far ought not be sacrificed at the altar of political expediency.