Moody’s Upgrades India’s Credit Rating
Moody’s upgrade of India’s credit rating after 13 years has come as an endorsement of Modi government’s policies. It will provide economic benefits to India and give political benefits to PM Modi. Students of competitive exams should understand as to why the upgrade was done and what are the expected benefits.
Reasons for Upgrade
- The GST will contribute to productivity gains and higher GDP growth by improving the ease of doing business, unifying the national market and enhancing India’s attractiveness as a foreign investment destination.
- Demonetization was expected to increase tax net, increase the formal economy and reduce corruption.
- GDP Growth. It has lowered India’s growth forecast to 6.7% in 2017-18 owing to demonetization, GST and other issues. It considers India’s growth potential as stronger than most peers. I quote Moody’s report:
“Combined with a large and diversified economy and improving global competitiveness, this boosts economic strength, our view of an economy’s shock absorption capacity, which we assess as “High (+)”, the fourth highest score on our 15-rung sovereign factor score scale”.
Moody expects India’s GDP growth to bounce back to 7.5% in 2018-19.
- Debt-GDP Ratio. At this time India’s debt-to-GDP ratio is set to rise hence the timing appears surprising. India’s general government debt burden, at about 68% of the GDP in 2016, is significantly higher than India’s peers at average 45%. Interest payments are about 22% of general government revenue, the highest interest burden among its peers and nearly three times the average of 8%. Moody’s said it expects India’s debt-to-GDP ratio to rise by about one percentage point this fiscal year, to 69%, as nominal GDP growth has slowed . India has formed Fiscal Responsibility and Budget Management (FRBM) Review Committee to target combined government debt of both the centre and the states, holding that recent widening of Indian state deficits has more than offset the narrowing of the central government deficit in recent times. Many states issued Ujwal DISCOM Assurance Yojana (UDAY) bonds as part of a government program to restructure the outstanding debt of the state electricity boards. According to the Reserve Bank of India (RBI), this added about 0.7 percentage point of GDP to states’ gross fiscal deficits, raising them to 3.6% of GDP from what would have been 2.9% in the fiscal year ended March 2016. Moody’s said:
“Recent reforms, combined with India’s structural strength, offer greater confidence that the high level of public indebtedness, which is India’s principal credit weakness, will not rise materially even in potential downside scenarios and will eventually decline gradually.”
- Cumulative Impact of Policies. Moody’s felt that measure like use of Aadhaar, Direct Benefit Transfer, increased tax base and degree of formalization of the economy, expenditure efficiency through rationalization of government schemes and better-targeted delivery will gradually improve India’s fiscal metrics over time. Other beneficial policies are:
- MPC Formation. Formation of a Monetary Policy Committee (MPC) has already enhanced the transparency and efficiency in India.
- Recapitalization of Public Sector Banks (PSBs). Recapitalization of PSBs is considered helpful in improving the economy.
- Proactive steps towards a resolution of high NPLs through use of the Bankruptcy and Insolvency Act 2016 are considered to address a key weakness in India’s sovereign credit profile.
- Strong Fundamentals. India remains one of the fastest growing economies in the world with strong fundamentals and economic reforms. According to IMF World Economic Outlook October 2017, India is expected to surpass all its BRICS and ASEAN counterparts (except Myanmar), including China, Indonesia and Malaysia in terms of GDP growth in 2018.In the longer term, India’s growth potential is significantly higher than most other Baa-rated sovereigns .
- Private Consumption. India’s private consumption expenditure is also expected to grow at a CAGR of 7 per cent from $1.3 trillion in 2016 to about $2 trillion by 2022. Maximum consumer spending is likely to come from the food, housing, consumer durables, transport and communication sectors. India’s total household wealth stood at $5 lakh crore while the country is home to 245,000 millionaires, says a Credit Suisse report. The number of ultra-rich population in the country is expected to reach 372,000 while the total household income is likely to grow by 7.5 per cent annually to touch $7.1 lakh crore by 2022, the report said. Rising income will help to increase consumption expenditure in the country.
- India’s exports grew 4.7 per cent to $274.7 billion during FY17 from $262.3 billion in FY16, its fastest pace in five years. A revival of growth and demand in developed economies and a surge in commodity prices in 2H17 boosted Indian shipment. Exports are set to rise as the world economy improves.
- Rising FDI. India’s foreign exchange reserves stood at approximately $398 billion as on October 6, 2017 as compared to $372 billion in the previous year on the same date. The increase can be attributed to a rise in foreign currency assets. Global investors are taking advantage of high real interest rates and a strong rupee, which has gained more than 6 per cent in 2017 (till September) against the US dollar.
- Construction Sector. India’s construction sector is considered to be the country’s second largest employer and contributor to economic activity after agriculture. It employs more than 35 million people. It accounts for the second highest inflow of FDI after services. The construction industry has contributed nearly 8 per cent to the national GDP during the last five years. The Indian construction industry is expected to grow in the future.
Long Term Economic Benefits
- India is likely to attract greater inflow of funds to support public as well as private expenditure to promote growth and create jobs.
- The share market will continue to rise.
The report endorses the Modi government’s economic policies. This will definitely be promoted by the BJP in a big way to reap benefits in elections.