Moody's upgrades India on better growth prospects, reforms

In a boost to the Modi government, Moody's Investors Service today raised India's sovereign rating for the first time in over 13 years, saying that growth prospects have improved with continued economic and institutional reforms.
The US-based agency upped India's rating to Baa2 from Baa3, changing outlook to 'stable' from 'positive', and said that reforms will help stabilise rising levels of debt.
Finance Minister Arun Jaitley termed the move as "belated recognition" of reforms undertaken by the government and said the reform agenda will continue with emphasis on higher spending on infrastructure and in rural areas.
Government officials expressed hope that other credit rating agencies such as S&P and Fitch would follow suit.

While upgrading the rating, Moody's cited reforms like the recently-introduced Goods and Services Tax (GST), improvements to the monetary policy framework, measures to clean up non-performing loans and efforts to bring more areas into the formal economy.
The one-level step-up from the lowest investment-grade ranking puts India in the league of the Philippines and Italy.

India's sovereign credit rating was last upgraded in January 2004 to Baa3 (from Ba1). 'Baa3' was thelowest rating in the investment grade -- just a notch above the 'junk' status. Baa2 rating means investment grade with moderate credit risk, and is two notches above the junk grade.

Moody's had in 2015 changed rating outlook to 'positive' from 'stable'.
The rating upgrade comes within weeks of the World Bank handing a 30-place jump to India on its ease of doing business ranking to place it at 100th rank.
"We welcome (the upgrade) and believe that it is a belated recognition of all the positive steps taken in India in the last few years which have contributed to the strengthening of the Indian economy," Jaitley said
It recognises major economic and institutional reforms undertaken by the government, he added.
He promised to stick to the path of fiscal discipline.

There are fears that the government may turn populist as the BJP prepares for about a dozen state polls and the general election in 2019.
Railway Minister Piyush Goyal said the government will stay on the path of good governance and focus on effective delivery to people.
The government "is going to do what it has to do on the domestic front -- employment growth, economic growth, reviving investment," said Chief Economic Advisor Arvind Subramanian.
Economic Affairs Secretary Subhash Chandra Garg said the upgrade has recognised government efforts on fiscal deficit, consolidation and debt control.
Moody's said the upgrade is underpinned by expectation that "continued progress on economic and institutional reforms will, over time, enhance India's high growth potential and its large and stable financing base for government debt, and will likely contribute to a gradual decline in the general government debt burden".

In a statement, it further said: "While India's high debt burden remains a constraint on the country's credit profile, Moody's believes that the reforms put in place have reduced the risk of a sharp increase in debt, even in potential downside scenarios."
Moody's projected India's real GDP growth to moderate to 6.7 per cent in the current financial year, from 7.1 per cent in 2016-17.
While GST and demonetisation have undermined growth over the near term, real GDP growth will rise to 7.5 per cent in 2018-19 as disruption fades, it said.
It went on to list demonetisation, Aadhaar system of biometric accounts and targeted delivery of benefits through the Direct Benefit Transfer (DBT) system intended to reduce informality in the economy as other measures that had an impact.

Key steps that are yet to fructify include planned land and labour market reforms, which rely to a great extent on cooperation with and between states, Moody's said.
The government's efforts to reduce corruption, formalise economic activity and improve tax collection and administration, including through demonetisation and GST, both illustrate and should contribute to the further strengthening of India's institutions, it added.
However, challenges with implementation of GST, ongoing weakness of private sector investment, slow progress with resolution of banking sector asset quality issues and lack of progress with land and labour reforms at the national level remain, it said.

Moody's cautioned that a material deterioration in fiscal metrics and the outlook for general government fiscal consolidation would put negative pressure on the rating.
The rating could also face downward pressure if the health of the banking system deteriorates significantly or external vulnerability increases sharply.