Moody's Investors Service today raised India's sovereign rating for the first time in 13 years, saying growth prospects have improved with continued progress on economic and institutional reforms.
The US-based agency upped India's rating to Baa2 from Baa3 and changed its rating outlook to 'stable' from 'positive', saying the reforms will help stabilise rising levels of debt.
Top officials of the government hailed the rating upgrade by Moody's as "long overdue" and hoped others such as S&P and Fitch will follow suit as it presses ahead with steps to ratchet up growth.
Moody's cited the recently-introduced Goods and Services Tax (GST) that removed inter-state barriers to ramp up productivity, improvements to the monetary policy framework, measures to clean up non-performing loans and efforts to bring more areas into the formal economy.
Baa2 rating means investment grade with moderate credit risk, which is two notches above the junk grade.
The one-level shift from the lowest investment-grade ranking puts India in the league of the Philippines and Italy.
Moody's had last upgraded India in 2004. It had in 2015 changed rating outlook to 'positive' from 'stable'.
Baa3 rating was thelowest investment grade -- just a notch above 'junk' status.
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.
Chief Economic Advisor Arvind Subramanian said the rating upgrade was "long overdue" and is a recognition of reforms like GST, bank recapitalisation plan, bankruptcy code and macro-stability.
The government, he said, "is going to do what it has to do on the domestic front -- employment growth, economic growth, reviving investment", he told reporters here.
Economic Affairs Secretary Subhash Chandra Garg said the upgrade has recognised government efforts on fiscal deficit, consolidation and debt control.
The upgrade, Moody's said, is underpinned by its 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 over the medium term".
"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," the ratings agency said in a statement.
It projected India's real GDP growth to moderate to 6.7 per cent in the current fiscal, from 7.1 per cent last year.
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, according to Moody's.
"While a number of important reforms remain at the design phase, Moody's believes that those implemented to date will advance the government's objective of improving the business climate, enhancing productivity, stimulating foreign and domestic investment, and ultimately fostering strong and sustainable growth," the rating agency said.
The reforms programme, it added, will thus complement the existing shock-absorbance capacity provided by India's strong growth potential and improving global competitiveness.
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.
Other 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.
The assessment of Moody's is the recent reforms offer greater confidence that the high level of public indebtedness, which is India's principal credit weakness, will remain stable, even in the event of shocks and will ultimately decline.
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 further said.
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.
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