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India’s sovereign rating finally sees an upgrade

By Priyanka Venkat

The Indian government’s various economic reforms have attracted a lot of debate over the course of its time in office. While many of these reforms have been criticised for their viability and effectiveness, the recent Upgrade of the country’s sovereign Rating by Moody’s could be an indicator of growing confidence in the government’s policies.

Along with changing the outlook from positive to stable, India’s Credit Rating was raised to Baa2 from Baa3—the lowest level of investment grading—and is the first upgrade in the country’s rating in 14 years. This upgrade has been welcomed by the government, which believes that this recognition for its reforms is long overdue.

The reasons for the upgrade

The government’s numerous institutional and economic reforms—both prospective and those already implemented—played a big role in inducing Moody’s to upgrade the rating. The credit rating agency explained the reason behind the upgrade in a statement: “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”

These objectives include efforts by the government to establish a unified tax regime through the implementation of the GST. Moody’s believes that this move will boost productivity through the elimination of the current system of numerous indirect taxes that pose barriers to the flow of trade between states. However, if measures taken by the government to ease in the rules for GST compliance are successful, then the agency believes that a real GDP growth rate of 7.5% is possible from the financial year 2018, up from an expected 6.7% in 2017.

The agency also believes that policy reforms, such as the Rs 2.11 lakh crore recapitalisation plan and the rolling out of the Insolvency and Bankruptcy Code, could address the recurring problem with non-performing assets in the banking system. Additionally,  policies such as last year’s demonetisation and the development of the Aadhar system have also been recognised by Moody’s as reforms that could prove to be positive catalysts that stimulate growth. Proper implementation of the Aadhar biometric system might make it easier to provide benefits through Direct Benefit Transfers (DBT), and might streamline the government’s efforts to open bank accounts through the Jan Dhan Yojana scheme. Moody’s said that while demonetisation and the GST may have slowed growth in the short term, net benefits may accrue over the medium term.

Impact of the rating on the economy

The rating upgrade will have a positive impact on the economy, as it will lead to increased confidence in the country’s markets. It is, therefore, likely to attract foreign investments and make international borrowing cheaper. The upgrade will also translate into an improved rating for sovereign bonds, thus allowing for the raising of funds abroad at a lower cost.

The stock market responded favourably to the upgrade with the Nifty closing at 10,293.60 points, signifying an increase of 0.67%, and the BSE Sensex finishing at 33,342.80, which is an increase of 0.71%. The news had a positive impact on the position of the rupee as well, with it closing at 65.02 per dollar, up by 0.47%.

Pressure from other credit rating agencies

The Indian government has been clamouring for an upgrade to its rating for a long time. Last year, the government sent emails and letters to the agency in the hope that it would reconsider its position on the rating.  However, Moody’s refused to budge, despite the provision of numerous facts by the government showing that the country had successfully drawn down its debt burden over the previous few years and that the country’s annual growth was exceeding six percent.

The global sovereign credit rating market is dominated by only three US-based credit rating agencies—Fitch, Standard and Poor’s (S&P’s) and Moody’s. For many years the Indian government has criticised these western credit agencies for rating developing countries unfairly. Indeed, the lack of information that the agencies make available about their ratings models and methodologies have led many emerging countries to call these rating systems into question. The agencies charge a high amount of fees from the financial and governmental institutions that request the ratings. It is often felt that extremely wealthy investors are given priority by the agencies and are awarded favourable ratings.

Prime Minister Modi has made efforts over the past two years to attract support for his idea of a separate ‘BRICS rating agency’ that would provide ratings for developing countries. In May this year, China faced a rating downgrade—its first in nearly 30 years. In this case, the Chinese government aimed their criticism of the rating agency on its methodology. Already, the possibility of a separate rating agency formed by the BRICS nations poses a threat to the Western agencies.

Take advantage of the upgrade now

Moody’s has warned that a downgrade is imminent if there is any deterioration in the country’s fiscal position or banking system. Thus, while the recent upgrade has been long-awaited and could have favourable outcomes for the country, it is imperative that the government take efforts to continue to stimulate growth in order to make the most of the advantages that this year’s upgrade provides.


Featured Image Source: Creative Commons



This post first appeared on The Indian Economist | For The Curious Mind, please read the originial post: here

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