Govt's reform agenda powers Moody's India rating upgrade

A Moody's sign on the 7 World Trade Center tower. Photo: Reuters
On Friday, Moody’s Investors Service upgraded India’s ratings to Baa2 on the back of several reforms implemented by the Prime Minister Narendra Modi-led National Democratic Alliance (NDA) government.

The key reforms that the rating agency factored in its decision include the shift to the new indirect tax regime (goods or services tax or GST), the new monetary policy framework, measures taken to address the non-performing assets (NPA) problem, along with demonetisation, Aadhaar and the targeted delivery of benefits through the direct benefit transfer (DBT) system.

“Wide-ranging economic and institutional reforms undertaken by the government will enhance India’s growth potential,” said Moody’s Investor Service. “Reforms implemented till date will advance the government’s objective of improving the business climate, enhancing productivity, stimulating foreign and domestic investment, and ultimately fostering strong and sustainable growth,” it said.

Reforms such as the GST, which is expected to broaden the tax base, coupled with the rationalisation of government schemes and better-targeted delivery, improved tax collection and administration and the push towards formalisation, are expected to improve India’s fiscal position in the coming years as well as strengthen India's institutions, it noted.

On the fiscal front, Moody’s noted that “efforts to improve transparency and accountability, including through adoption of a new Fiscal Responsibility and Budget Management (FRBM) Act, are expected to enhance India's fiscal policy framework and strengthen policy credibility.”

But there is reason to be cautious.

General government debt (Centre and states) which stood at 68 per cent of the gross domestic product (GDP) in 2016 is expected to rise further to 69 per cent, placing India higher than the median debt ratio (44 per cent) of countries rated Baa2. Add to this the expected increase in central government debt on account of bank recapitalisation and higher state debt on account of farm loan waivers etc., and the situation is worrying.

But while Moody’s cautions that any fiscal slippages along with a deterioration of the health of the banking system would put negative pressure on the rating, it does point out that the impact of the high debt load is offset to some extent “by a large pool of private savings available to finance government debt”. It expects the “debt burden to remain stable over the next few years, falling thereafter as nominal GDP growth continues and revenue-broadening and expenditure efficiency-enhancing measures take effect”.

On reforms of factor markets — notably land and labour — the report points out that “important measures which have yet to reach fruition include planned land and labour market reforms, which rely to a great extent on cooperation with and between the states.”

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