The Narendra Modi government has just received a pat on the back from a heavyweight—credit rating agency Moody’s.
Moody’s has upgraded India’s ratings after a gap of 13 years in a report released on Nov. 16. The country’s sovereign rating has now moved a notch above Baa3, the lowest investment grade and just a level above junk rating, to Baa2.
Although Moody’s acknowledged that the Indian economy has taken a beating as a result of the goods and service tax (GST) and demonetisation, it reckoned that both would turn out to be worthwhile in the long run. “Government efforts to reduce corruption, formalise economic activity, and improve tax collection and administration, including through demonetisation and GST, both illustrate and should contribute to the further strengthening of India’s institutions,” said the report.
As a result, GDP growth in this financial year may moderate to 6.7%, compared to 7.1% last year, the report stated. However, as the effects of the disruptions fade away and the economy gets back on track, Moody’s estimates that India will grow at 7.5% in the next fiscal year. “(In the) longer term, India’s growth potential is significantly higher than most other Baa-rated sovereigns,” added the report.
Apart from the GST and demonetisation, the other reforms that will help India’s economic fortunes include an improved monetary policy framework, steps taken to address the ballooning bad-loan problem, the Aadhaar system of biometric accounts, and targeted delivery of benefits through the direct benefit transfer system, Moody’s said.
Meanwhile, other major ratings agencies, S&P (BBB- Stable) and Fitch (BBB- Stable) are yet to upgrade India.
“The question now is whether or not S&P and Fitch follow. Our bias is that they will likely wait for the government’s fiscal position to actually improve before making any changes (on outlook, followed by rating), but directionally we believe India is headed the right way,” brokerage firm Nomura said in a report.
The Modi government has been obsessed with ratings agencies for some time now, and had reportedly lobbied hard for an upgrade from Moody’s last year. But when that didn’t happen, the government changed tack and harshly criticised the methodology adopted by global credit rating firms, calling their analysis “egregious” and “compromised.”
Now, having got the upgrade it sought, Modi and Moody’s are on the same page.