The decision of the international credit rating agency Moody’s to raise India’s sovereign credit rating and to upgrade the outlook for the country would be widely welcomed as a positive signal. The agency has improved its rating of the country after 13 years. Most of these years were a period of impressive growth for the economy but Moody’s had refused to improve its report card. The revision has come ironically when the economy has lost its old verve, with GDP growth falling continuously for many quarters, inflation threatening to go up again and many other parameters worsening. The informal economy is reeling from a badly conceived demonetisation exercise and a poorly implemented GST system. The revenue outlook is uncertain and oil prices are showing signs of rising. But rating agencies have their own rationale and methods of assessment.
Moody’s decision may have been prompted by some structural and other reforms undertaken by the government to improve the economy and the way business is done. GST is an important reform measure and will do good when glitches are removed. The agency may also have taken note of the recent moves to address the problem of mounting NPAs of public sector banks. The rating agency’s decision was an immediate acknowledgement of these steps. The agency has said that the reform measures would help to improve the business climate, enhance productivity, stimulate foreign and domestic investment, and ultimately foster sustainable growth. The immediate impact will be that the government, public sector companies and some private firms will be able to avail foreign funds at cheaper rates. The rating agency expects India to grow at 6.7% in the current year and growth to pick up later if the reform measures continue and the macroeconomic situation improves further.
But there are risks and the agency has viewed them with concern. If the recapitalisation plan mooted for banks does not work well, the economy and the financial system would be badly hit. The agency says there is a need to watch the external vulnerability which may worsen if oil prices rise further. High public debt, which was 68% of the GDP in 2016, is a major worry. These concerns will have to be addressed and fiscal deficit targets will have to be met. The government is highly pleased with the agency’s decision, though it had once dubbed international rating of the economy as unimportant. It has a long way to go as serious challenges still remain to be tackled. It should also be noted that two other rating agencies – Standard and Poor’s and Fitch – are yet to revise their rating.