Moody’s defends its rating upgrade for India
Moody’s states its ranking action is driven by its assessment that Narendra Modi government’s reforms will improve India’s structural credit strengths and improve global competitiveness
By Associated Press|Updated: November 21, 2017
New Delhi: Credit rating firm Moody’s Investors Service on Tuesday defended its decision to update India’s sovereign ranking to Baa2 from the most affordable investment grade, holding that its ranking action is driven by its evaluation that reforms brought out by the Narendra Modi federal government will boost India’s structural credit strengths, including its strong growth capacity, and improve worldwide competitiveness along with India’s steady and large financing base for federal government debt.
Responsing to criticism from some quarters about its credit upgradation of India at a time economic growth is slowing down and, by its own admission, India’s debt-to-GDP ratio is set to increase, Moody’s released an in-depth answer sheet of often asked concerns addressing the motorists of the sovereign ranking upgrade and the implications for other Indian issuers.
On the concern of the factor for an upgrade amid India’s current macroeconomic downturn, Moody’s stated, while it has lowered its development forecast for India to 6.7% in 2017-18 to take into consideration the recent slowdown, the economy’s growth potential is strong and stronger than a lot of peers. “Combined with a large and diversified economy and enhancing international competitiveness, this increases financial strength, our view of an economy’s shock absorption capability, which we examine as “High (+)”, the 4th highest score on our 15-rung sovereign aspect score scale,” it said.
Moody’s anticipates India’s GDP development to bounce back to 7.5% in 2018-19.
India’s real GDP development slowed to 5.7% in the very first quarter of 2017-18, following a downturn to 6.1% in the previous quarter. “The economic downturn reflects the short-term effect of demonetization and destocking of stock in advance of the implementation of the GST (products and services tax) in July,” it stated.
Answering the concern how did it factor demonetisation and introduction of GST into its score decision, Moody’s said gradually, the GST will contribute to performance gains and higher GDP development by enhancing the ease of doing company, unifying the national market and improving India’s appearance as a foreign financial investment destination, while demonetisation ought to help in reducing tax avoidance and corruption.
On the question of rating upgrade coming at a time when debt-to-GDP ratio is set to increase, Moody’s stated: “Recent reforms, combined with India’s structural strength, deal greater confidence that the high level of public insolvency, which is India’s principal credit weak point, will not rise materially even in prospective downside circumstances and will ultimately decrease gradually.”
India’s basic federal government debt problem, at about 68% of the GDP in 2016, is substantially greater than India’s peers at typical 45%. Interest payments have to do with 22% of general federal government earnings for India, the highest interest concern among its peers and nearly three times the average of 8%.
Moody’s stated it anticipates India’s debt-to-GDP ratio to rise by about one portion point this , to 69%, as nominal GDP development has slowed following demonetisation and the execution of GST.
It supported the suggestions of the Fiscal Responsibility and Budget Management (FRBM) Review Committee to target combined federal government financial obligation of both the centre and the states, holding that current widening of Indian state deficits has more than balance out the narrowing of the main government deficit in current times.
In the last 2 years, many states provided Ujwal DISCOM Assurance Yojana (UDAY) bonds as part of a government program to reorganize the arrearage of state electrical energy boards. According to the Reserve Bank of India (RBI), this added about 0.7 percentage point of GDP to states’ gross financial deficits, raising them to 3.6% of GDP from exactly what would have been 2.9% in the fiscal year ended March 2016.