Modinomics gets Moody’s thumbs-up

In a significant boost to the Modi government’s reform agenda, which has faced flak in recent weeks following a growth slowdown, Moody’s Investors Service cited these very measures to upgrade India’s sovereign rating a notch and changed the outlook to positive from stable.

This is India’s first rating upgrade since 2004, when it was upgraded to Baa3 from Ba1. However, the other two global rating agencies — Fitch and Standard & Poor’s — maintain a BBB- rating with a stable outlook for India.

“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,” the international rating agency said in a release on Friday, adding that the government’s wide-ranging economic and institutional reforms will improve the business climate and foster strong and sustainable growth.

Welcoming the move, Finance Minister Arun Jaitley said it is a “belated recognition” of the reforms undertaken by the government.

“It is an upgrade that has happened after 13 years. We welcome it and believe that it is a belated recognition of all the positive steps taken in India in the last few years which has contributed to the strengthening of the Indian economy,” he told reporters.

Chief Economic Advisor Arvind Subramanian, whose Economic Survey had a piece on the “poor standards” of the rating agencies, echoed these sentiments, noting that the upgrade was long overdue. Ratings, he noted, are not causes for government action but are in fact the result of measures.

Why ratings matter Sovereign ratings are a barometer for investors to ascertain the country’s economic health and investment climate. Moody’s 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 reform program will thus complement the existing shock-absorbance capacity provided by India's strong growth potential and improving global competitiveness,” it said.

The government and the Finance Ministry had been seeking an upgrade for the past few years, citing the high economic growth and improved fiscal deficit. ‘Baa3’ is the lowest rating in the investment grade, just a notch above ‘junk’ status.

Jaitley reiterated the government’s commitment to structural reforms and said fiscal prudence will be maintained. “We maintain fiscal discipline and continue to remain on the fiscal glide path,” he stressed.

Taking on detractors who have criticised reforms, including demonetisation and GST, Jaitley, said, “I am sure that many who had doubts would now seriously introspect on their own positions.”

He also refuted there was any link between the upgrade and the elections in Gujarat and Himachal Pradesh, and said stable reforms will not be possible if only election-oriented decisions are taken.

Going forward, the government will continue to emphasise implementation of reforms and “reap the benefits of the growth process in terms of expenditure, infrastructure building and rural areas,” Jaitley said.

Finance Secretary Hasmukh Adhia said, “The path the government has chosen for long-term reforms and fiscal consolidation is recognised by investors. The rating agency too has now confirmed it formally, which is welcome”.

Moody’s gave a thumbs-up to the reform agenda, which are seen to include demonetisation, and said that 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 “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,” it said.

It, however, said the high public debt burden remains an important constraint on India's credit profile relative to its peers, notwithstanding the mitigating factors which support fiscal sustainability.