The latest upgrade in the country’s sovereign credit rating from negative to stable by the global rating agency, Moody’s Investors Services has given a signal that the pandemic-hit economy is now on a clear upward path. The upgrade provides a comfort level for foreign investors and global financial institutions concerned over debt service issues. As for other rating agencies, Fitch has also kept the outlook as stable for India while Standard and Poors continues to peg it as negative.
Ratings of these agencies continue to carry weight in the eyes of the international financial community, even though government agencies and some commentators contest the value of their perceptions. No wonder then that last year’s downgrade by Moody’s came in for severe criticism in the last Economic Survey which argued that it was not justified based on the economy’s performance.
The upgrade is based on the assessment that there has been an improvement in the financial sector and economic recovery has been faster than expected across sectors. While the agency remains concerned over the country’s high debt burden, it now expects a gradual reduction of the fiscal deficit over the next few years, preventing further deterioration of the sovereign credit profile.
But what brings most cheer is Moody’s analysis of the NPA crisis in the Indian banking system. It maintains that things have changed for the better, solvency in the financial system having been strengthened, improving credit conditions which are expected to be sustained as policy settings normalise. It notes that bank provisioning has allowed for the gradual write-off of legacy problem assets over the past few years. There is thus much less risk of financial sector issues impinging on the real economy.
The second significant aspect of the assessment is the expectation that India’s real GDP growth will average around six percent over the medium term. It also expects real GDP to surpass pre-pandemic levels of 2019 in the current fiscal, to rebound to 9.3 percent, followed by 7.9 percent next year.
Even though government spokespersons contest the 6 percent growth target envisaged for the medium term, it is clear the rating agency sees economic activity picking up and broadening across sectors. It is also noteworthy that the rating agency expects real GDP to surpass pre-pandemic levels within the current fiscal itself.
As for the credibility of rating agencies, many are skeptical of their forecasts given their dismal performance before the 2008 financial crisis when none were able to predict the institutional crash at the time. Even so, these agencies have retained their stature as guideposts for international investors and financial institutions involved in lending to this country and other emerging economies.
The upgrade comes just as the World Bank has reiterated its June prediction of 8.3 percent GDP growth for 2021-22. This is lower than Moody’s projection as well as that of the Reserve Bank of India which has set its sights on 9.5 percent growth. The government itself has been insisting that it will be more in the region of ten percent.
The Bank’s prediction, however, comes along with a comment that India should move to a services sector-led growth model to strengthen recovery. It is also critical of the very heavy regulation of the formal services sector. It suggests that applying this level of regulation to new services that have developed during the pandemic will “kill” them. While it does not advocate removing regulations altogether, the Bank’s spokespersons have indicated that a lower level of controls could be considered rather than the existing restrictive regulations.
These comments could be seen as criticism of the greater regulations now being imposed both on e-commerce giants as well as social media entities. This concern may not be justified given the fact that even European countries and Australia are trying to rein in the power of the tech giants, whether it is in terms of biased advertising or not giving enough credence to news media used on these platforms. But the efforts being made in this country are being viewed with some amount of distrust, evidently owing to worries that India may also impose severe curbs as has been done by China.
At the same time, most of these global institutions consider the Indian economy to be on an upward path and on the way towards normalcy. This viewpoint has been buttressed by the assurance given by Chief Economic Advisor Krishnamurthy Subramaniam that the taper tantrum may not have as much of an impact on the economy as in 2013 as the fundamentals of the economy are in better shape right now. The taper tantrum phenomenon refers to the situation at that time when the U.S. Federal Reserve began slowing down its quantitative easing programme. It announced that it would slow down the pace of buying U.S. treasury bonds to reduce the amount of money flowing into the economy. Then, as of now, much of the money had flowed to emerging economies like India. The slowdown led to huge capital outflows from this country by foreign portfolio investors, spurring a 15 pe cent depreciation of the rupee within just a few months.
Currently, there are fears that another taper tantrum could take place when the Federal Reserve begins to cut back on bond purchases and thus brings the surplus liquidity scenario to an end. Even now it is possible that a large outflow of funds by foreign portfolio investors could hurt the Indian economy. But in some respects, the fundamentals are truly in better shape, especially in terms of foreign exchange reserves. These are now in the region of 600 billion dollars as compared to 275 billion dollars in 2013. In addition, the banking sector is in better health with NPAs having reduced over the past two years.
The Moody’s rating upgrade thus signals that not just the RBI and the government, but international financial agencies too feel the green shoots of recovery show the revival of growth. Much will depend in the coming days on the pace of vaccinations as well as the prospects of a third wave. The country has to be on its guard during the festival season when there are large congregations. But even a third wave is not likely to cause severe disruption to economic activity and growth rate targets for the current fiscal now look achievable.