Moody’s upgrading India to Baa2 levels in 14 years must be welcomed, but with caution
November 2017 is proving to be a good month for the BJP government in the Centre. After the World Bank ease of doing business rankings in which India jumped 30 spots, comes the news of global ratings' agency Moody’s upgrading India to Baa2 levels (from Baa3) on November 17, inviting immediate cheers and a mood-lift in the market, as the Sensex rose.
Moody’s Investors Service – known worldwide for its stocks, currency, sovereign bond and banking sector assessments – raised India’s sovereign rating for the first time since 2004, 13 years that encompass two consecutive UPA governments. Moody’s has pegged this upgrade on the future outlook projections based on a cluster of “policy changes undertaken by the Narendra Modi government”. The rupee too has surged by one per cent to 64.67 per dollar, while the “yield on the 10-year sovereign bond” went down by 11 basis points to 6.96 per cent, and the benchmark equity rose by 1.25 per cent. The markets have reflected an immediate bounce, with the Sensex rising by 400 points after the announcement, crossing 33,520, while the Nifty gained 120 points.
According to reports, Moody’s has changed the outlook from “positive” to “stable”, putting India in the same bracket – of Baa2 – as Spain, Italy, Oman, the Philippines, Panama, Bulgaria, Uruguay and Colombia. India’s gross debt-to-GDP ratio has been placed at 68.7 per cent, while gross national savings, as percentage of GDP, is at 28.6 per cent. The debt-to-GDP ratio is 98.7, 133, 44.5, 33.9, 40, 24.6, 59.8 and 48.5 respectively for the countries in the Baa2 level, as mentioned above.
The upgrade from Baa3 to Baa2 – one notch higher than the “lowest investment grade ranking” – is owing to “stabilisation of (rising) debt levels”, according to Moody’s. The ratings agency has expressed a favourable opinion of Modi government’s “reform agenda”, praising moves like demonetisation, GST and the Aadhaar-driven cashless push, indicating greater formalisation.
Union minister of finance Arun Jaitley held a press conference on the trending issue, in which he weighed in on the long-term benefits of the “structural reforms” agenda started by Modi government, which would be reflected in the GDP growth rate in the coming years, as estimated by the Moody’s (about 6.8 per cent in 2018, 7.5 per cent in 2019).
FM Jaitley also added that those “those doubting India’s reform process would now introspect on their positions”, after the sovereign ratings upgrade.
The chief economic adviser to Modi government, Arvind Subramanian, has called the Moody’s upgrade as an “overdue correction”, saying this should have happened a year back. He added: "This is a recognition of India's macro economic reforms. But it has also to be kept in mind that these are external factors. And the government will pursue its own reform agenda. And those will drive our economic development."
CEA Subramanian added that the upgrade was recognition of reforms such as GST, bank recapitalisation plan, bankruptcy code, macro-stability, among others.
Similarly, finance secretary Hasmukh Adhia echoed FM Jaitley and CEA Subramanian, when he said the Modi government’s economic reforms agenda is being recognised worldwide, as reflected in the upgradation of the sovereign credit rating by Moody’s.
What does the Moody’s rating mean
Moody’s rating indicates the overall fiscal health of an economy, and its debt-to-GDP ratio, which when higher indicates a healthier banking sector, though debts mustn’t become bad loans. The balance is achieved by looking at the savings-to-GDP ratio. Moody’s Baa2 rating clubs a number of developing countries such as the Philippines, Bulgaria, Colombia with European developed nations like Spain and Italy, which have been battling debt crisis of their own. Baa2 indicates that investment-friendly climate is bing created for businesses abroad and within, and that the debt is within manageable limits.
Increasing formalisation and a trajectory along that line has been the bedrock of the Moody’s ratings upgrade, even as FM Jaitley hinted at “relaxing fiscal consolidation roadmap”, which is slightly ironical.
Boost for Modi government
Evidently, after the World Bank ease of business rankings, and the Pew Global survey published on November 15 that showed that PM Modi has high approval ratings despite the economic shocks of demonetisation and GST that shook the informal sector, the Moody’s ratings upgrade is being hailed as a big bonanza for the Modi government that was battling bad press in the country and abroad, owning its “tinkering” and “not much of reformer” PM, according to The Economist.
Now, the bevy of good press is being showcased by the government and the ruling party as evidence of Modi’s “reform agenda”, which is finally reaping benefits. Tweets and press statements from PMO and ministers as well as BJP members have flooded social and mainstream media, particularly drawing attention to the feat that was achieved after 14 years, bypassing the economist PM Manmohan Singh’s 10-year-long governance under the UPA.
Importantly, the string of upward-looking economic reports have come just before the all-important, high-stakes Gujarat Assembly elections, which was witnessing a rupture in the BJP narrative of “vikas” or development, with the Opposition led by Congress vice-president Rahul Gandhi and three musketeers – Hardik Patel, Alpesh Thakore and Jignesh Mevani – commanding the Patidar, OBC and Dalit votes, upping the ante, riding on the strong anti-incumbency among the small trading classes, Patidars, Muslims, Dalits, OBCs, farmers among others.
The new narrative twist with freshly gilded certification from the Moody’s might help bolster the BJP plank of vikas, even as PM Modi and BJP national president Amit Shah ensure last-mile booth management and door-to-door outreach to every single voter in the western state.
Caution over Moody’s ratings upgrade
Both GST and demonetisation were aimed at increasing formalisation of the Indian economy, and therefore, the Moody’s ratings can be explained as a recognition of the same, in addition to structural reforms like bankruptcy code, bank recapitalisation plan, among others. However, much like the glaring lacunae in the World Bank ease of doing business rankings, this one too is essentially a matter of the formal sector, which has seen relative higher cashless transactions and digital finances going up, even though the cash component is now back to its 2016 levels.
Neither of the two reports takes into account the blow suffered by the staggering informal sector of the Indian economy, as they are not supposed to anyway. The two percentage loss of the GDP owing to the twin shocks of GST and demonetisation basically eroded the informal sector, leading to over a million lost jobs and throwing many out of gear, robbed of wages, even resulting in 140 odd deaths owing to anxiety, in case of note-ban. On the other hand, the issues of black money, terror funding among others, remain as they were, and if Paradise Papers revelations tell us anything, it is that the wealthy reroute taxable money through these offshore havens leaving chunk of the black income intact.
This is precisely why the Moody’s upgrade must be welcomed with dollops of caution, because the mammoth inequality in Indian economy, with its skewed ownership (one per cent owns 58 per cent of the economic pie) is here to stay, as neglect of the informal economy, that employs 90 per cent of Indians and contributes about 45 per cent of the GDP, continues.
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