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Credit rating agency Moody’s Investors Service this week enhanced GoI’s rating outlook from negative to stable. It also affirmed Baa3 ratings for long-term loans in both domestic and foreign currency, indicative of moderate credit risk. It’s welcome and signals the worst of the pandemic induced economic shock is behind us. Two of the underlying reasons for the change in outlook are of particular importance. Moody’s forecast that the real GDP in 2021-22 will surpass the pre-pandemic level. Effectively, it means that it will take two years to get back on track, a period lower than what was widely estimated early on.
Another important conclusion is that risks of financial sector instability are receding. Consequently, the danger to the real economy from financial sector fragility is less likely. Years of provisioning by banks and additional capital raising exercises have built a cushion. The proximate cause for the relatively positive outlook is the acceleration in India’s vaccination drive over the last two months. The risk of another surge in Covid cases has not disappeared. However, the cumulative vaccination coverage, now at 921.7 million, has minimised the risk of the healthcare system getting overwhelmed. Therefore, the likelihood of economic disruption because of a surge has receded.
The good news was tempered by a sobering reflection on some areas where risks remain high. The most noteworthy of them is the social risk. Moody’s classifies it as highly negative. It arises from low and uneven distribution of income and unequal access to quality education and healthcare. Matters aren’t helped by what the rating agency terms as weakness in policy effectiveness. India needs a massive increase in the contribution of its manufacturing sector to GDP. Rapidly advancing technology calls for big investments in human capital. This is an area that both GoI and states need to pay more attention to.
The agency expects real GDP growth to average around 6% over the medium-term. While this may move the needle in reducing the fiscal deficit as a proportion of GDP, it will be inadequate to meet the need of a growing youth demographic entering the job market. High level of self-employed in India’s labour market classification is mainly a proxy of job scarcity. GoI needs to finesse its reform messaging to get a larger buy-in from the population. It’s widely accepted that the status quo cannot fulfil India’s aspirations. Transitions however are as much about effective communication as they are of sound policy.
This piece appeared as an editorial opinion in the print edition of The Times of India.