S&P, the most sought after of the rating agencies, had in December reaffirmed sovereign rating of India at BBB- with stable outlook
It is feared that a large fiscal expansion, imperative to bring the economy back on its feet, could invite a ratings downgrade
The government has identified eight sectors for fast-track reforms with the twin objective of escaping a downgrade of the sovereign by global ratings agencies as well as attracting companies looking to move out of China, officials familiar with the development told Mint. The idea is to showcase to agencies like Standard & Poor’s (S&P) and Moody’s Investors Service that the government is serious about reforms as well as striking a fiscal balance even as it goes for higher expenditure and incentives to restore the health of the economy.
Several brokerages and forecasters have cut their outlook on India’s growth for the ongoing financial year. Among the global bodies, the International Monetary Fund (IMF) has the most optimistic projection. It sees India’s FY21 GDP growing at 1.9%, down from 5.8% projected in January. Barclays and Fitch Ratings have both pegged it at 0.8% and Goldman Sachs at 1.6%.
It is feared that a large fiscal expansion, imperative to bring the economy back on its feet but coming at a time of depleted coffers, could invite a ratings downgrade. Japanese financial services giant Nomura warned on 30 April that S&P may consider an outlook downgrade. On the same day, Fitch warned India's sovereign rating could come under pressure.
S&P, the most sought after of the rating agencies, had in December reaffirmed sovereign rating of India at ‘BBB- with stable outlook’. After lowering in November its outlook to ‘negative’ from ‘stable’, Moody's Investors Service today cautioned that India’s sovereign rating could be downgraded if its fiscal metrics weaken materially.
“The list of these eight sectors is ready. Reforms in some of them may need legislative changes but the groundwork is being done to undertake those measures," one of the officials said, naming pharmaceuticals (drugs and chemicals), electronics (including mobile and IT hardware manufacturing) and energy (coal and power) as three of the eight sectors on the shortlist. He refused to name other sectors as he is not authorised to speak to the media, adding that deliberations are happening at the highest levels in the Prime Minister’s Office (PMO).
In the last two-three weeks, while adhering to social distancing norms, Prime Minister Narendra Modi has met several of his ministers and bureaucrats at least twice, including finance minister Nirmala Sitharaman, commerce minister Piyush Goyal, road transport and highways minister Nitin Gadkari and home minister Amit Shah. At these meetings, he has stressed on the need for reforms.
In one move that is in line with the government’s own reform path, a Parliamentary committee had on 23 April recommended allowing companies with up to 300 workers to fire people or close down units without prior approval of the authorities. That recommendation is yet to become a law though.
“The PM has shifted gears. He is mindful of the unemployment that the lockdown has caused and realises that reforms are the only way out. One reason they are important is to persuade the credit rating agencies that India is serious about effecting major structural changes to its economy," another source said.
According to data released by Centre for Monitoring Indian Economy, the lockdown resulted in one in four people losing job during March-April.
This source said the reforms will also be aimed at attracting companies keen to move their manufacturing out of China. A more than two-year-long trade war between the US and China, that has seen them imposing prohibitive tariffs on each other’s goods, has resulted in several companies moving their base out of the world’s second largest economy to Vietnam, Taiwan and Thailand. India has made little headway in getting those investments. Modi is keen to change this scenario.
A 4 May Bloomberg report had said the government has identified 461,589 hectare, almost twice Luxembourg’s size, to offer to those companies.
India is currently in the third phase of what has, since 25 March, been the world’s most stringent lockdown to prevent the spread of covid-19. The 40-day lockdown which was to end on 3 May was extended by another two weeks, albeit with relaxed conditions.
As the Centre and states struggle to find ways to exit the lockdown, the covid-induced lockdown has dealt the Indian economy a big blow.
The India Manufacturing Purchasing Managers’ Index (PMI), compiled by IHS Markit, fell to 27.4 in April from 51.8 in March on a seasonally adjusted basis, according to data released on 4 May. Similarly, the IHS Markit Services PMI plunged to 5.4 in April from 49.3 in March, the biggest contraction in the survey’s 14-year history. A reading of less than 50 indicates contraction in business activity.
The government had in March announced a ₹1.7-trillion stimulus package that came to around only 1% of the country’s gross domestic product even as many other nations, with a lockdown that was far less restrictive, have announced several times bigger stimuli.
The relief package, under a newly framed Prime Minister Garib Kalyan Yojana, aimed to alleviate the sufferings of migrant workers, farmers, rural poor and women. The central bank too, on its part, has announced steps amounting to at least ₹4 trillion, to help out banks, non-banking finance companies (NBFCs), mutual funds and individual borrowers by allowing them to defer their loan repayments by three months. A larger fiscal stimulus is now eagerly awaited.
As per a 27 April Bloomberg report, the government is considering a proposal to guarantee as much as ₹3 trillion of loans to small businesses as part of a plan to restart Asia’s third-largest economy. A 3 May Reuters report said the government will cap its overall spending on relief at around ₹4.5 trillion.
"We have to be cautious as downgrades have started happening for some countries and rating agencies treat developed nations and emerging markets very differently," the Reuters report quoted an unnamed government official as saying.
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