Skip to main content

A Fair Acknowledgement

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.


Popular posts from this blog

Uday: a federalist success story

At our 21 st Annual CEO Roundtable in Thimphu last week, there was spirited debate over the performance of the current administration. A participant suggested that the Ujjwal Discom Assurance Yojana (Uday), a scheme to reform India’s downstream power sector, for all its fanfare was actually a failure of sorts and that India’s renewable energy programme, specifically on solar energy, was lacking on many counts. Whilst it was my intuitive belief that both claims were unsympathetic, I thought it would perhaps be in order to examine the facts in detail and subsequently provide an assessment. This paper, accordingly, presents an analysis of the first of the two issues – the Uday programme. The second will be addressed in a subsequent piece. The electricity distribution crisis: background Electricity distribution has been disastrously managed over the last three decades and in 2015 was on the verge of absolute collapse. Under-priced power, operational inefficiency, broken equip

The Employment Conundrum

Over the last three months, I have had the opportunity of engaging with our clients across various forums and cities. What provided a platform for this interaction was my briefing on four critical initiatives that we believe will, if properly implemented, serve as game changers with a palpable impact on economic output. The question that consistently came up almost everywhere was on the perception of jobless growth and consequently, rising unemployment within India. This has possibly been based on recent press reports and television debates that consistently cite certain headline statistics. These suggest a fall in employment levels between 2011-12 and 2015-16 compared to vigorous growth in earlier years, since 2004-05. Even on the surface, this conclusion does not gel fittingly with other statistics. For instance, indirect tax collections and consumption expenditure, which are both proxies of aggregate spending and wellbeing, do not corroborate falling employment. Tax collections

All the Prime Minister's Men

The composition of Prime Minister Manmohan Singh’s cabinet would suggest a desire to resume the process of reforms, which had practically stalled during his somewhat uninspiring previous term. It is also indicative of a more assertive Congress Party within the larger coalition of the United Progressive Alliance. The Congress has retained key economic ministries and also taken control of other important ones that were previously with their allies. With Pranab Mukherjee at the Treasury, P Chidambaram at Home and AK Antony at Defence, three crucial departments appear to be in the most capable hands. Mr Mukherjee, possibly the senior most member of the Singh administration, has over the years served in various positions in the government. He was India’s Finance Minister between 1982 and 1984 in the Indira Gandhi cabinet and brings to the table considerable technical competence and robust political acumen. Disinvestment of state-owned enterprises; financial sector reform; the implementat