Go for growth, signals S&P–economic times

Clipped from: https://economictimes.indiatimes.com

It is to the credit of the rating agency S&P that it has retained India’s sovereign credit rating, despite forecasting sharply negative growth in the current fiscal. This is a far cry from the entrenched perception that rating agencies mechanically look at standard metrics such as the growth rate, the fiscal deficit and inflation to churn out a rating, regardless of the actual potential of the economy. This is most welcome. The takeaway from S&P’s rating is that the government should focus on fortifying the economy and not worry about what rating agencies will say.

S&P has retained its BBB– long-term and A-3 short term rating for India, based primarily on its potential for growth. That the fiscal deficit would go up sharply, as the growth rate dives, is factored into the rating. What matters for S&P is how growth and deficit levels would behave in the future, not their plight in the current year. This is an argument for a sharp rise in the fiscal deficit now, to administer as large a stimulus as is possible. It has been pointed out that a feeble stimulus that induces a weak uptick in the growth rate is likely to result in a rising debt/GDP ratio, whereas a significant rise in the growth rate, to achieve which the stimulus and, therefore, the rise in the fiscal deficit would need to be correspondingly high, would lead on to a trajectory of falling debt/GDP ratio. The magnitude of the fiscal deficit is not the prime concern. The policy mix that builds the ecosystem for growth is equally important. If the policies induce and feed high rates of growth, they would carry a bigger weight with rating agencies than the size of the fiscal deficit.

The political leadership has some low-hanging policy fruit to pluck. Make it clear that consumers have to pay for the power they draw. If political patronage for power theft and power giveaways were to be ended, the power supply would stabilise, a large chunk of the banks’ non-performing assets would turn performing, and the states’ fiscal situation would improve. All these would be positive for India’s rating.

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