The government, which had been facing a lot of criticism from opposition parties and also a few economists in the last few months for the slowdown in GDP in two consecutive quarters, breathed a sigh of relief after international rating agency Moody’s upgraded India’s credit rating from BAA3 to BAA2. Later, the GDP growth rate in July-September quarter went up to 6.3 percent from 5.7 percent in the preceding quarter.
Opposition parties had been accusing the government of destabilising the economy with decisions like demonetisation and Goods and Service Tax (GST), because of which business was hit and jobs dwindled. Interestingly Moody’s has appreciated the government for these decisions while upgrading India’s credit rating, and that too after a gap of 13 years. Moody’s has said that the government has been managing the economy better. It’s important to note that just four years ago Moody’s had placed India as one of the five most fragile economies of the world, as both fiscal deficit as well as Current Account Deficit (CAD) in Balance of Payment were at their peak. It’s believed that government has given stability to the economy by controlling these deficits.
In addition, International Monetary Fund (IMF) has estimated India’s Per Capita Income on Purchasing Power Parity (PPP) Basis at US$ 7170 for 2017, up from US$ 6690 in 2016. Though our Per Capita Income remains lowest among BRICS nations, India has moved to 126th position from 127th position one year ago. In a world which has been facing recession, improvement in credit rating and increase in Per Capita Income surely indicates a strengthening of the Indian economy. Decisions of the government painted as disastrous domestically are being called important reforms by the international rating agencies.
The reason for upgrade in rating after 13 years, especially when the same rating agency had termed India to be one of the most fragile economies four years ago, is economic reforms undertaken by the government which have improved business environment and productivity. This may give a boost to investment, both foreign and domestic, and growth would become stable. Moody’s have also appreciated steps like Demonetisation, GST, Aadhaar linking and Direct Benefit Transfer (DBT) as these steps would help to limit public debt and improve business environment.
Moody’s has said it may take time for benefits of Demonetisation and GST to be reaped and therefore in 2017-18, GDP growth may remain subdued at 6.7 per cent; however, in years to come it will improve. According to Moody’s, disruptions caused by Demonetisation and GST would recede with time but benefits like limiting of public debt and increase in tax base may benefit the economy in the long run.
According to Moody’s, because of compliance with Fiscal Responsibility and Budget Management (FRBM) Act, constitution of Monetary Policy Committee etc., there is now greater transparency in government policies. New Bankruptcy Act and recapitalisation of public sector banks will reduce the risks for banking system.
When international rating agencies improve sovereign credit rating of a country, not only government, even private companies start getting loans at a lower interest rate. Though it is true that most of the public debt in India is from domestic sources, some loans are also taken from abroad mainly through External Commercial Borrowings (ECB). Therefore, not only for private sector, cost of borrowing will come down for government as well. Apart from reducing cost of borrowing, outgo of valuable foreign exchange will come down. For a long time capital formation both by public sector as well private sector had slowed down. With reduced cost of borrowing due to improved credit rating, capital formation may get a boost. This may accelerate growth in GDP.
Improved credit rating by Moody’s mean that India’s economic position has improved based on international standards, indicating improved strength of Indian economy. Moody’s has not predicted any big increase in GDP growth in the short run, as there have been some disruptions in the economy due to demonetisation and GST, which may continue for some more time.
Tax receipts may also be lower for some time from now. However, increase in number of income tax payers after demonetisation and increased formalisation of Indian economy after GST may help in increasing tax-GDP ratio, due to increased number of tax payers. All this indicates future strengths of Indian economy and exchequer.
However, we need not be complacent about these claims, as we will have to deal with these short-term problems most efficiently. For that, important steps are needed to be taken, including reduction in interest rates, increase in private and public investment and last but not least increased outgo on education and health.
If history is any guide, credit ratings of nations by these agencies are not always very honest and dependable; therefore, we need not get swayed by them. It is notable that when these rating agencies had given A2 rating to the US in 2007; after only a few months their giant banks and financial institutions went bankrupt. On the other hand, these rating agencies continued to have negative attitude toward India despite numerous strengths. It’s a matter of happiness that they have changed their mindset now and upgraded our credit rating at last.
We need to evaluate developing countries from their view point and not from the view point of the developed world. Agencies like Moody’s, Fitch and others look upon India from the angle of FDI coming from the western world. We must understand that development of India cannot happen by FDI alone. It can happen majorly by Indian enterprise, especially small enterprise, which provides employment and also promotes inclusive and decentralised development. Government needs to go further to promote start-ups and small-scale enterprises. Along with encouraging investment, we need to encourage employment generation and environment protection too.
Today, all those economies which are termed as strong suffer from huge inequalities; people feel more insecure than before, unemployment is at much higher and alarming levels. This raises a question mark the extent to which rating agencies are dependable for determining economic well-being.
The writer is Associate Professor, PGDAV College, University of Delhi.