New Delhi: Credit rating agency Moody’s Investors Service on Tuesday defended its decision to upgrade India’s sovereign rating to Baa2 from the lowest investment grade, holding that its rating action is driven by its assessment that reforms carried out by the Narendra Modi government will enhance India’s structural credit strengths, including its strong growth potential, and improve global competitiveness as well as India’s large and stable financing base for government debt.
Answering to criticism from some quarters about its credit upgradation of India at a time economic growth is slowing down and, by its own admission, India’s debt-to-GDP ratio is set to rise, Moody’s published a detailed answer sheet of frequently asked questions addressing the drivers of the sovereign rating upgrade and the implications for other Indian issuers.
On the question of the reason for an upgrade amid India’s current macroeconomic slowdown, Moody’s said, while it has lowered its growth forecast for India to 6.7% in 2017-18 to take into account the recent slowdown, the economy’s growth potential is strong and stronger than most peers. “Combined with a large and diversified economy and improving global competitiveness, this boosts economic strength, our view of an economy’s shock absorption capacity, which we assess as “High (+)", the fourth highest score on our 15-rung sovereign factor score scale," it said.
Moody’s expects India’s GDP growth to bounce back to 7.5% in 2018-19.
India’s real GDP growth slowed to 5.7% in the first quarter of 2017-18, following a slowdown to 6.1% in the previous quarter. “The economic slowdown reflects the temporary impact of demonetization and destocking of inventory in advance of the implementation of the GST (goods and services tax) in July," it said.
Answering the question how did it factor demonetisation and introduction of GST into its rating decision, Moody’s said over time, the GST will contribute to productivity gains and higher GDP growth by improving the ease of doing business, unifying the national market and enhancing India’s attractiveness as a foreign investment destination, while demonetisation should help reduce tax avoidance and corruption.
On the question of rating upgrade coming at a time when debt-to-GDP ratio is set to rise, Moody’s said: “Recent reforms, combined with India’s structural strength, offer greater confidence that the high level of public indebtedness, which is India’s principal credit weakness, will not rise materially even in potential downside scenarios and will eventually decline gradually."
India’s general government debt burden, at about 68% of the GDP in 2016, is significantly higher than India’s peers at average 45%. Interest payments are about 22% of general government revenue for India, the highest interest burden among its peers and nearly three times the average of 8%.
Moody’s said it expects India’s debt-to-GDP ratio to rise by about one percentage point this fiscal year, to 69%, as nominal GDP growth has slowed following demonetisation and the implementation of GST.
It supported the recommendations of the Fiscal Responsibility and Budget Management (FRBM) Review Committee to target combined government debt of both the centre and the states, holding that recent widening of Indian state deficits has more than offset the narrowing of the central government deficit in recent times.
In the last two years, many states issued Ujwal DISCOM Assurance Yojana (UDAY) bonds as part of a government program to restructure the outstanding debt of state electricity boards. According to the Reserve Bank of India (RBI), this added about 0.7 percentage point of GDP to states’ gross fiscal deficits, raising them to 3.6% of GDP from what would have been 2.9% in the fiscal year ended March 2016.