Over the past few months, there has been
growing debate on the performance of the Modi administration. Sceptics have
argued that things are stumbling and have used events such as the aftermath of demonetisation,
GST implementation slippages and more recently, a drop in GDP output, as the basis
of their contention. Be that as it may, the fact is India’s structural
parameters are presently more robust, substantiated in clear terms by Moody’s
recent upgrade. Its local and foreign currency paper is now rated Baa2 from
Baa3, placing its economy in the same category as Italy, Spain and the
Philippines. Moody’s decision reflects its assessment that structural
initiatives of the administration will in the longer term enhance India's
growth potential, reduce the government’s debt burden and provide greater
stability against macroeconomic shocks. Interestingly, Moody’s last upgrade
took place 14 years ago during the Vajpayee era.
Many analysts had expected, some months
ago, that ratings agencies might take a more lenient line in the wake of India’s
political stability and improving public finances. However, what came in the
way were mounting dud loans within a stressed banking system and the absence of
a nationwide Goods and Services Tax. Clearly, things now look so much better on
all three fronts. Despite temptations of indulgence, the Government stuck unfailingly
to deficit targets, reducing them from over 5% of GDP (during the tenure of the
previous Congress-led Government) to 3.2%; implemented GST; and most
importantly, found a clever solution to restock the strained balance sheets of
India’s state-owned banks. Admittedly, GST still faces a set of complex challenges
but in the longer term, once these are ironed out, will improve efficiency
within industry and generate higher tax revenues for the Government.
Analysts have been mystified by the timing
of the move coming as it does on the heels of a dip in GDP growth, stagnating
private investment, subdued industrial output and erratic export performance.
But the fact is, sovereign ratings are not influenced by the vagaries of cyclical
factors but rather the structural robustness of the economic system and its ability
to service loans. Admittedly India’s public debt at 68% of GDP is somewhat
higher than the median of 44% within the Baa category of nations. Still, its
risk is mitigated by the large pool of private savings; long maturities of
outstanding Government debt at over 10 years; and perhaps most significantly,
the fact that the bulk of it is denominated in Indian Rupees. All of this
provides an unusually high degree of shelter from currency volatility as well
as economic shocks.
The upgrade comes with handy consequences.
To begin with, it will allow foreign investors such as endowment, pension and
sovereign funds to invest greater sums in India as their country-wise
allocations are governed by rating norms. Second, the cost of international borrowings
by Indian companies will come down by another 5-10 basis points. Expectedly,
the ratings of corporations such as Indian Oil, NTPC and State Bank of India
have automatically been upgraded.
Moody’s decision, in the ultimate analysis,
is a reflection of confidence in the fundamentals of India’s economy. In some
ways therefore, it is an endorsement of its administration, governance
paradigm, economic, fiscal and monetary policies. Whilst short term challenges
will continue there is something to cheer about in the long term.
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