Modi gets Moody’s thumbs up

Giving Narendra Modi Government’s reforms policy the thumbs up, global rating agency Moody’s Investors Service on Friday upgraded India’s sovereign rating with one-notch to Baa2 from Baa3 after a long gap of over 13 years.

The rating, however, overlooked a haze of short-term economic uncertainties to bet on the nation’s prospects from a series of policy changes by the Prime Minister. With the Moody’s positive outlook, the Government expects the country’s economy will grow by 7-8 per cent in FY 2018.

The credit rating agency’s move comes at a time when the BJP-led Government is facing an important Assembly polls in Modi’s home State Gujarat next month. With this booster dose, the party has some reasons to claim its winning position in the State showcasing all-round development during last three years.

Sovereign rating is a barometer of the country’s investment climate. It gives investors insight into the level of risks associated with investing in a particular country and also includes political risks.

After the Moody’s upgraded India’s sovereign ratings to Baa2 from Baa3, rupee, bonds and stocks rallied and cheered all stakeholders. Cheering good to investors and instilling in their confidence, both key indices Sensex and Nifty

ended with more than 0.5 per cent gains, powered by financial and metal stocks.

Moody’s said reforms being pushed through by the Modi Government will help stabilise rising levels of debt. “That’s a one-level shift from the lowest investment-grade ranking and puts India in line with the Philippines and Italy,” it said. While Government officials hailed the move as long overdue, some investors termed it a surprise given that India recently surrendered its status as the world’s fastest-growing major economy amid sweeping policy change.

Finance Minister Arun Jaitley said Moody’s upgrade recognises the fiscal prudence that India has committed itself to and termed it after 13 years as ‘belated recognition’ of reforms undertaken, saying that the reform agenda will continue with emphasis on higher spending on infrastructure and in rural areas.

“The fact that a series of steps, including demonetisation, which are now taking Indian economy to a greater formalisation and digitisation, something which is being universally acknowledged,” Jaitley said.

Moody’s had in 2015 changed rating outlook to “positive” from “stable”. The rating upgrade comes within weeks of the World Bank handing a 30-place jump to India on its ease of doing business ranking to place it at 100th rank.

The Finance Minister further said that it is recognition and an endorsement of the reform process which has gone on in India, particularly in the last 3-4 years, where a number of structural reforms have taken place which has placed India on a path of high trajectory growth.

“We welcome this upgrade, we believe that it is a belated recognition of all the positive steps which have been taken in India in the last few years, which has contributed to strengthening of Indian economy,” he said, adding that if you look at our track record of three years, it has been one of the better records in Indian history as far as fiscal discipline is concerned, and we intend to move on that track.

The upgrade came after 13 years. India’s sovereign credit rating was last upgraded in January 2004 to Baa3 (from Ba1). ‘Baa3’ was the lowest rating in the investment grade -- just a notch above the ‘junk’ status.

A slew of structural reforms the Finance Minister listed included the Goods and Services Tax (GST), putting in place a sound monetary policy framework, recapitalisation of public sector banks, demonetisation and use of Aadhaar to bring formalisation and digitalisation in the economy.

Asked what would be the next reform thrust, Jaitley said the important emphasis now would also be implementation as well as reaping benefits. “Emphasis would be on infrastructure building and spending in rural areas,” he said, adding that foreign institutional investor (FII) inflows are already positive and would continue to remain so after the rating upgrade,” he said.

On GST, he said rationalisation of tax rates is gradually underway and will benefit businesses. “The rates are lower than those prevailing before the new indirect tax regime was introduced in July,” he added.

On the path of fiscal consolidation, he added, “Our track record for the past three years speaks for itself. And we intend to continue to be on that track. If you look at our track record of three years, it has been one of the better records in Indian history as far as fiscal discipline is concerned and we intend to move on that track.”

Giving a thumbs-up to Moody’s rating upgrade, India Inc and bankers welcomed the ratings. Industry giants said the move is a reaffirmation of the Government’s reforms push that will boost foreign capital inflows and lead to overseas borrowings at better rates, while bankers as well as financial sector stalwarts said it was long overdue and will reduce the borrowing cost for the country.

However, a statement by the Finance Ministry said the rating upgrade recognises India’s commitment to macro stability which has led to low inflation, declining deficit and prudent external balance. “It also reflects on the Government’s fiscal consolidation programme which has resulted in reduction of the deficit from 4.5 per cent of the GDP in 2013-14 to 3.5 per cent in 2016-17 and its consequential sobering impact on general Government debt,” said Jaitley, adding that the GST itself has been universally regarded as landmark reform in tax structure.

Boasting the growth of Indian economy, he further said, “The upgrade has not happened in isolation and for the last three years the India has been the fastest growing major economy. After a long spell of 13 years, India gets the rating upgrade and I am sure that many who had doubts would now seriously introspect on their own positions,’ he said.