India's rating upgrade : Civil Services Mentor Magazine: JANUARY - 2018


::India's rating upgrade::


  • Since the present union government took over in may 2014, there has been a consistent effort to improve the quality and quantity of Indian economy. The vision of JAM trinity has led to decrease in the leakage of the subsidies and unnecessary wastage of the public finances. Jan dhanyojana has led to the opening of more than 25 crore bank accounts in the country and the poor is now mostly integrated in the economy of the country. Similarly through Mudra yojana loans have been disbursed to the needy section of the society. NDA Government’s push to infrastructure has been evident. Be it Railways, Roads, or Shipping the Government is focusing on augmenting the infrastructure to aid in connectivity. For the first time, Railways budget focused on structural reforms and infrastructure changes. Probably the most important reform of all is single indirect tax in the form of Goods and services tax in the country. Single indirect tax will lead to improvement business activity in the country, it will make the doing of business completely hassle free.
  • All this has led to the improvement of economic health of the country. India is the fastest growing large economy in the World. India has also seen a large jump of 30 places in the World Bank’s Ease of doing business index. This will also make India more attractive as an investment designation. Ease of doing business index has improved due to various factors but important among them is Govt has repealed Close to 1800 obsolete legislations, transparency in the auctioning and functioning of government.
  • Key elements of the reform program include the recently-introduced Goods and Services Tax (GST) which will, among other things, promote productivity by removing barriers to interstate trade; improvements to the monetary policy framework; measures to address the overhang of non-performing loans (NPLs) in the banking system; and measures such as demonetization, the Aadhaar system of biometric accounts and targeted delivery of benefits through the Direct Benefit Transfer (DBT) system intended to reduce informality in the economy. Other important measures which have yet to reach fruition include planned land and labor market reforms, which rely to a great extent on cooperation with and between the States.
  • Most of these measures will take time for their impact to be seen, and some, such as the GST and demonetization, have undermined growth over the near term. Moody's expects real GDP growth to moderate to 6.7% in the fiscal year ending in March 2018 (FY2017). However, as disruption fades, assisted by recent government measures to support SMEs and exporters with GST compliance, real GDP growth will rise to 7.5% in FY2018, with similarly robust levels of growth from FY2019 onward. Longer term, India's growth potential is significantly higher than most other Baa-rated sovereigns.
  • After taking into consideration the above mentioned reform initiatives Moody's Investors Service ("Moody's") has upgraded the Government of India's local and foreign currency issuer ratings to Baa2 from Baa3 and changed the outlook on the rating to stable from positive. Moody's has also upgraded India's local currency senior unsecured rating to Baa2 from Baa3 and its short-term local currency rating to P-2 from P-3.The decision to upgrade the ratings is underpinned by Moody's expectation that continued progress on economic and institutional reforms will, over time, enhance India's high growth potential and its large and stable financing base for government debt, and will likely contribute to a gradual decline in the general government debt burden over the medium term. In the meantime, while India's high debt burden remains a constraint on the country's credit profile, Moody's believes that the reforms put in place have reduced the risk of a sharp increase in debt, even in potential downside scenarios.
  • Moody's has also raised India's long-term foreign-currency bond ceiling to Baa1 from Baa2, and the long-term foreign-currency bank deposit ceiling to Baa2 from Baa3. The short-term foreign-currency bond ceiling remains unchanged at P-2, and the short-term foreign-currency bank deposit ceiling has been raised to P-2 from P-3. The long-term local currency deposit and bond ceilings remain unchanged at A1.
  • The government is mid-way through a wide-ranging program of economic and institutional reforms. While a number of important reforms remain at the design phase, Moody's believes that those implemented to date will advance the government's objective of improving the business climate, enhancing productivity, stimulating foreign and domestic investment, and ultimately fostering strong and sustainable growth. The reform program will thus complement the existing shock-absorbance capacity provided by India's strong growth potential and improving global competitiveness.

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  • Government efforts to reduce corruption, formalize economic activity and improve tax collection and administration, including through demonetization and GST, both illustrate and should contribute to the further strengthening of India's institutions. On the fiscal front, efforts to improve transparency and accountability, including through adoption of a new Fiscal Responsibility and Budget Management (FRBM) Act, are expected to enhance India's fiscal policy framework and strengthen policy credibility.
  • Much remains to be done. Challenges with implementation of the GST, ongoing weakness of private sector investment, slow progress with resolution of banking sector asset quality issues, and lack of progress with land and labor reforms at the national level highlight still material government effectiveness issues. However, Moody's expects that over time at least some of these issues will be addressed, resulting in a steady further improvement in India's government effectiveness and overall institutional framework.
  • Recent announcements of a comprehensive recapitalization of Public Sector Banks (PSBs) and signs of proactive steps towards a resolution of high NPLs through use of the Bankruptcy and Insolvency Act 2016 are beginning to address a key weakness in India's sovereign credit profile.
  • While the capital injection will modestly increase the government's debt burden in the near term (by about 0.8% of GDP over two years), it should enable banks to move forward with the resolution of NPLs through comprehensive write-downs of impaired loans and increase lending gradually. Over the medium term, if met by rising demand for investment and loans, the measures will help foster more robust growth, in turn supporting fiscal consolidation.
  • The rating could face upward pressure if there were to be a material strengthening in fiscal metrics, combined with a strong and durable recovery of the investment cycle, probably supported by significant economic and institutional reforms. In particular, greater expectation of a sizeable and sustained reduction in the general government debt burden, through increased government revenues combined with a reduction in expenditures, would put positive pressure on the rating. Implementation of key pending reforms, including land and labor reforms, could put additional upward pressure on the rating.

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