Slip is showing: Moody’s downgrade of India’s economic outlook should be a wake-up call that triggers structural reforms

On the eve of the third anniversary of demonetisation, credit rating agency Moody’s Investors Service changed the outlook on the Indian government’s ratings from stable to negative even as it reaffirmed the existing foreign and local currency ratings. Two years ago, Moody’s had upgraded India’s rating. According to Moody’s, there has been an increase in the risk that economic growth will remain materially lower than in the past. This is a dismal conclusion about India’s future trajectory. It’s also one that is in sync with the assessment that the current slowdown is structural rather than cyclical in nature.

Moody’s, for all practical purposes, has questioned the efficacy of the government’s policies addressing the slowdown. Consequently, the agency expects a rise in India’s debt burden. The government has certainly taken some positive steps to mitigate the slowdown but it still hasn’t come up with a coherent vision. To illustrate, even as corporate tax rates were lowered to make India globally competitive, the labour market was made more inflexible through a code on the national minimum wage. Taking measures to improve India’s ranking in World Bank’s ease of doing business is welcome but inadequate to change the mood on investment.

Not only are we forecast to record the third consecutive year of a decline in economic growth, both savings and investments as a proportion of GDP have trended downward over the last few years. Unless this trend reverses, don’t expect a durable shift upwards in the economic growth trajectory. One necessary measure to reverse this negative trend is to impart stability to policy making. Harmful shocks like demonetisation should never be repeated. Investment usually flees a policy regime of sudden changes. Moody’s downgrade should serve as a wake-up call to address the structural problems of the economy.

This piece appeared as an editorial opinion in the print edition of The Times of India.

via Slip is showing: Moody’s downgrade of India’s economic outlook should be a wake-up call that triggers structural reforms

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s