What does Moody's know that India Inc. does not?

New Delhi: Amid complaints by business executives that the government is not moving fast enough on economic reforms, rating agency Moody’s Investors Service on Thursday gave the thumbs-up to the 10-month-old Narendra Modi administration by revising India’s credit rating outlook to ‘positive’ from ‘stable’.

Fitch Ratings kept the outlook unchanged at ‘stable’ grade.

Both Moody’s and Fitch kept India’s sovereign credit rating at the lowest investment grade level, one notch above the junk status.

A positive outlook means the sovereign rating has a greater chance of being upgraded in the next review by Moody’s.

“There is an increasing probability that actions by policy makers will enhance the country’s economic strength and, in turn, the sovereign’s financial strength over coming years,” Moody’s said. “India has grown faster than similarly rated peers over the last decade due to favorable demographics, economic diversity, as well as high savings and investment rates.”

Fitch insisted that India’s relatively weak business environment and standards of governance, as well as widespread infrastructure bottlenecks, would not change overnight. “Translation of the reforms into higher real GDP (gross domestic product) growth depends on the actual implementation,” Fitch said in a statement.

Business leaders have been critical of the Modi government in recent months, saying it hadn’t been moving fast enough on economic reforms.

On 7 April, Marico Ltd chairman Harsh Mariwala said in a Tweet that the government has to move faster: “Sheen is falling of Modi govt in the context of promises, and gradual delivery.”

In February, Housing Development Finance Corp. Ltd chairman Deepak Parekh said businesses were becoming impatient because nothing has changed on the ground.

In an interview to Hindustan Times on 8 April, Modi said that industry has to step up to seize the benefits of the “process we have set in motion”. He added that it was interesting that while businesses said his government had not done enough, the opposition Congress was saying it was too business-friendly.

On Thursday, the stock markets responded positively to Moody’s rating action, with the benchmark BSE Sensex rising 177 points to a one-month high of 28,885.21.

While Moody’s has been traditionally more optimistic about India than its peers, the divergence between the two rating agencies may be one between hope and reality.

D.K. Srivastava, chief policy adviser at EY India, said conflicting signals were coming from the ground and there wasn’t sufficient evidence of an upturn in the economy.

“Investment has not picked up. However, since the global economic climate is looking bleak, rating agencies are finding that India is the best bet in current circumstances. While Fitch is playing it safe, Moody’s is sharing the optimism of the government.”

Standard and Poor’s (S&P), which had been threatening to downgrade India to junk status, raised the outlook on India’s sovereign rating to ‘stable’ from ‘negative’ in September. In February, S&P said improvements in India’s weak fiscal balance sheet were likely to be gradual and unlikely to lead to a rating upgrade in the next three to five years.

Moody’s on Thursday said it believes that recent measures taken by the government to address inflation, keep external balances in check, simplify the regulatory regime for investors, increase foreign direct investment in many sectors including insurance and railways, and facilitate infrastructure development will reduce some of India’s sovereign credit rating constraints.

Fitch said implementation of the government’s reform agenda and structurally lower inflation would improve the sovereign credit profile, as both would create a better investment climate and boost real GDP growth. “However, India’s sovereign ratings are constrained by limited improvement in India’s fiscal position, which is a longstanding key weakness,” it added.

India’s combined fiscal deficit (both the centre and the states put together) stands at 7.2% of GDP while gross general government debt is 64.7% of GDP, both much higher than the medians for countries with an investment grade rating which are 2.7% of GDP and 41.4% of GDP, respectively.

Citibank India economist Rohini Malkani said in a report that in the near term, she expects an outlook revision by both S&P and Fitch, while in the medium term, she believes that “ongoing structural reforms, particularly on taxation, could catalyze a sovereign ratings upgrade”.

Moody’s cautioned that the rating outlook would be revised to stable if “economic, fiscal and institutional strengthening appeared unlikely, or banking system metrics remained weak or balance of payments risks rose”.

Prime Minister Modi, in a statement on his Facebook page, said “the ratings upgrade is the first ever in recent history due to three quarters of sustained hard work by Modi government.” Finance Minister Arun Jaitley posted on Twitter that the upgrade in outlook is significant “but we’ve to do more”.

Chief economic adviser in the finance ministry Arvind Subramanian said upgrading of India’s outlook to ‘positive’ by Moody’s validates the government’s reforms agenda as well as the fiscal discipline roadmap, and expressed hope for a rating upgrade in near future.

“The focus of the government is what needs to be done for the sake of economy and we hope for an investment upgrade. But that will not drive our policy going forward,” Subramanian said.

Reserve Bank of India governor Raghuram Rajan said the revision is a “positive perception of what we have done over the past few quarters”. He added: “We should not celebrate upgrades as we did not worry about downgrades. There are a lot of low-hanging fruits that need to be picked.”

PTI contributed to this story.