Moody's milder on India than S&P, Fitch

Moody’s Investors Service, which upgraded India’s rating by a notch after almost 14 years, has been more liberal over recent years in terms of rating the country’s ability to service debt, compared to peers Fitch and Standard & Poor’s.

In 2013, when India was struggling with the ‘twin deficit’ problem — of the current account and fiscal deficit — and high debt, Moody’s maintained a ‘stable’ outlook for the country. S&P and Fitch awarded a ‘negative’ outlook, increasing the chance of a ratings downgrade to ‘junk’ status.

Moody’s had then counted India's potential Gross Domestic Product (GDP) growth, robust savings rate and a dynamic private sector as strengths. The high fiscal deficit, debt ratios and supply constraints counted as weaknesses on the credit profile.

Last year, when Moody’s did not upgrade India’s rating, it had reportedly cited concerns over the country’s debt levels and weakness of banks to the government. 

Not much appears to have changed on the latter, with non-performing assets (NPAs) of public sector banks (PSBs) exceeding Rs 8 lakh crore by August, from about Rs 6 lakh crore till last year.

Moody’s has now upgraded India’s rating to Baa2, from its lowest investment grade of Baa3. It has given credit to the Narendra Modi government’s policy measures such as demonetisation, goods and services tax, setting up of a monetary policy committee and targeted subsidies through the citizen identification, Aadhaar.

The government in October also unveiled a Rs 2.11 lakh crore schedule over two years to bolster PSBs hit by NPAs. The plan comprises recapitalisation bonds, budgetary support and equity dilution.

Although S&P had in late 2014 revised India’s outlook from ‘negative’ to ‘stable’, it had cautioned that failure to implement reforms or deterioration in the fiscal or external situation could trigger a rating downgrade. This time as well, S&P said the country’s fiscal position remained weak. 

Soumya Kanti Ghosh, chief economic advisor at State Bank of India, said while the rating upgrade by Moody's was a positive for India, it seemed ‘ahead of the curve.’ 

“While Moody’s has not done a bad job, it may have pushed the government to maintain the fiscal deficit target, which is quite difficult at this point. Even maintaining inflation at four per cent has a fiscal cost. It would be challenging to achieve all the targets of inflation, fiscal deficit and current account deficit at the same time,” he said.

India’s debt to GDP ratio of roughly 69 per cent is significantly higher than the median for countries rated at the same level of Baa2 by Moody’s. The median debt to GDP ratio of 10 countries rated Baa2 is 42.8 per cent.

The Centre’s fiscal deficit target for 2017-18 is 3.2 per cent of GDP. According to the recommendations of the Fiscal Responsibility and Budget Management panel, the aim should be a deficit of 2.5 per cent by FY23. For FY19, it has suggested a target of three per cent. The recommendations are yet to be accepted by the government.


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