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Tuesday, December 5, 2017

Indian Economy appears to be out of woods….

As the year 2017 ebbs, we have some good news to cheer about: for the first time after 13 years, Moody’s Investor Services, the global credit rating agency, raised India’s sovereign rating from Baa3 to Baa2. Obviously, this is a welcome recognition of not only the country’s economic potential to grow, but also the acts of the government in putting in place the requisite structural reforms, such as the Goods and Services Tax Act, Insolvency and Bankruptcy Code to facilitate banks wriggle out of their bad debt problem with no further loss of time and recapitalization of public sector banks that affords fresh credit delivery for expansion/creation of production capacities, that are of course, long overdue.

Commenting on the reforms that the government has so far undertaken, the rating agency said that they would “advance the government’s objective of improving the business climate, enhancing productivity, stimulating foreign and domestic investment, and ultimately fostering strong and sustainable growth.” Cheered by this announcement, the stock market that witnessed pressure for the last few days has rebounded merrily. The forex market too reacted positively: rupee posted handsome gains intraday.

This upgrade also cheered the government for more than one reason: with our forex reserves at a comfortable level, this upgradation sends a strong signal about India’s economic stability, which in turn makes it easy for the government to mobilize loans and that too, at cheaper rates. It also improves the borrowing capacity of public sector undertakings and the blue-chip corporates from the global markets at a cheaper price. Improvement in the rating will encourage long-term investors such as pension funds to invest in Indian bonds. Simultaneously, existing investors are likely to increase their allocations to India. In short, this measure will boost confidence leading to higher capital flows and allocations.

Elaborating on the rationale behind the change in rating, William Foster, the Vice President of rating agency said that “the government’s commitment to fiscal consolidation remaining intact”, “over time, measures aimed at broadening the tax-base and improving the efficiency of government spending” shall be able to “contribute to a gradual narrowing of the [fiscal] deficit.” There is of course a flip side to it, said Foster: “a material deterioration in fiscal metrics and the outlook for general government fiscal consolidation can put negative pressure on the rating."

As against this, S & P rating agency retained India’s sovereign rating at the lowest investment grade with a stable outlook citing weak fiscal position, particularly of States; high government debt, and low per capita income at close to $2000 in 2017—the lowest of all investment-grade sovereigns that they rate—as the reasons. Intriguingly, it forecasted India’s economic growth to be robust in 2018-20, though the growth in the last two quarters is lower than expected owing to demonetization and introduction of the goods and services tax.

With one more rating agency, Fitch, still to announce its rating, there is of course, a feel-good factor pervading the global financial markets about Indian economy, for both the rating agencies have complimented the sitting government for its reforms agenda, because of which there is every likelihood of capital-hungry Indian businesses, particularly, lenders, enjoying the benefit of reduction in the capital cost by about 100 basis points. Obviously, such a reduction in the cost of debt funds for banks would mean a lot for the economy in general, more so when the government is recapitalizing the banks for enabling them to make fresh credit available to businesses.

There is yet another positive to emerge out of the current upgradation of India’s rating by Moody’s: the finance minister, who indeed said the other day, “no pause [on fiscal consolidation] … but challenges arising from structural reforms … could change the glide path”, is tied down to stay focused on fiscal consolidation and the government to stick to reforms course—the allurement of elections notwithstanding.

Another welcome development that followed the rating up-gradation is the announcement of the Central Statistics Office about the reversal trend in the GDP growth in the 2nd quarter of the current fiscal:   GDP at constant 2011-12 prices has grown by 6.3 per cent in the second quarter of 2017-18 as against 5.7 per cent in the previous quarter.   It certainly appears that the economy has at last shaken off from the side-effects of note ban and GST. 

Encouragingly, much of this growth in this quarter has come from manufacturing sector. Of course, there is a disturbing shade too: exports still continue to be anemic. Over it, the GDP data per se has to be taken with a bit of caution, for Statisticians, in absence of data such as sales tax receipts, have used such other methods as nominal value of commodity output, increase in tax revenues from petroleum-related products, etc. to arrive at the estimate.

Overall, we certainly have something to cheer up and capitalize on in the New Year!


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