Moody’s Gives Thumbs Up to Indian Economy

Overlooking a haze of short-term economic uncertainties and pinning faith in the continued progress on economic and institutional reforms, Moody’s Investor Services has upgraded India’s sovereign rating, citing that the reforms will improve the business climate in the country and raise productivity.

Global ratings agency, Moody's Investors Service has raised India’s sovereign rating for the first time since 2004, from the lowest investment grade of Baa3 to Baa2, changing the outlook from stable to positive.

Moody’s decision comes as an appreciation for Prime Minister Narendra Modi’s government and the reforms it has pushed through. It comes just weeks after the World Bank moved India up 30 places in its annual ease of doing business rankings. With the ground paved for institutional players from around the globe to not only pump in money but also set up shops, India’s stature in the international arena is bound to rise further.

Moody’s praised Modi’s efforts to broaden the tax base and tackle non-performing loans in India’s $2.3 trillion economy, Asia’s third-largest. The rating agency also hailed introduction of the GST, a landmark reform that turned India's 29 states into a single customs union for the first time and expects that it will promote productivity by removing barriers to interstate trade.

The upgrade adds to a string of good news for Modi. With this rating upgrade, the cost of capital will reduce and more FDI is expected to flow in, as certain investors don't invest in countries rated below Baa3.

While Moody’s acknowledged that the impact of these measures will take time to reflect, and some, such as the GST and demonetisation, have undermined growth, it expects real GDP growth to moderate to 6.7 per cent in the financial year ending in March 2018, with a pick up to 7.5 percent in the following year and similarly robust levels from 2019 onward.

However, the government's debt is a cause for concern, noted Moody's - with the debt to GDP ratio at 66 per cent in 2016 against a comfort level of 44 per cent in this particular rating category. This could severely hamper the government's ability to take any more debt for infrastructure projects, relying instead on issuing bonds, which may find greater acceptability due to the ratings upgrade.

Nevertheless, as disruption fades Indian economy is expected to register robust levels of growth. Stronger consumption and fiscal reforms are expected to improve business confidence and investment confidence in the country.

Latin Manharlal Group