Moody's upgrades India's rating citing reforms: What does it mean?
Thirteen years after last upgrading India's sovereign credit rating, Moody's has done it again, this time increasing it to 'Baa2', and changed the outlook to stable from positive. In 2004, it had upgraded India to 'Baa3': just one notch over 'junk'. Moody's attributed the recent development to economic/institutional reforms. This could mean a major win for the Narendra Modi government, especially ahead of elections.
GDP growth to see "robust" levels from 2019 onward
Moody's estimates India's GDP growth at 6.7% in the fiscal year ending March'18, but real growth will increase to 7.5% next fiscal. "Longer term, India's growth potential is significantly higher than most other Baa-rated sovereigns," Moody's observed.
High debt burden might be a constraint
The ratings agency mentions high debt burden as a constraint on India's credit profile. However, "continued progress on economic and institutional reforms…will likely contribute to a gradual decline in the general government debt burden over the medium term". Moreover, reforms already in place have "reduced the risk of a sharp increase in debt". Efforts to improve transparency and accountability will likely strengthen policy credibility.
Experts consider this surprising, but CEA thinks it was "overdue"
The upgrade came as a surprise for many, considering India recently lost its status as the world's fastest-growing economy. Moody's admitted measures like GST and demonetization "have undermined growth over the near term". But CEA Arvind Subramanian considers the upgrade "an overdue correction". However, "the government will pursue its own reform agenda," he insisted. Moody's expects GST to promote productivity in the long term.
What does it mean for India?
One impact of Moody's upgrade will be felt on the ratings of the government and corporates, which are constrained by the sovereign rating; international borrowing is now expected to get cheaper. Issuers of lower-rated paper will now have to spend more to make up for the perceived credit risk. It is also expected to improve sentiments in equity markets.
A major win for the BJP ahead of crucial elections
This comes even as a Pew study revealed PM Modi has left his political rivals far behind in terms of popularity. India also stunned the world by jumping 30 places on World Bank's ease of doing business index, ranking 100 of 190 countries. These might provide the BJP a boost ahead of the crucial Gujarat polls.
