Dr Ashwani Mahajan
Government, which had been facing a lot of criticism from opposition parties and also a few economists in the last few months, for the slowdown in GDP in two consecutive quarters, has got a sigh of relief after International rating agency Moody’s upgrade in India’s credit rating from BAA3 to BAA2, and later increase GDP growth rate in July-September quarter to 6.3 percent from 5.7 percent in the preceding quarter. Opposition parties have been accusing the Government for destabilising the economy with decisions like Demonetisation and Goods and Service Tax (GST), because of which business is badly hit and jobs have been vanishing. Interestingly Moody’s has appreciated the government for these decisions while upgrading credit rating, and that too after a gap of 13 years. Moody’s has stated that Government has been managing the economy in a better way. It’s important to note that merely 4 years ago Moody’s had placed Indian economy in one of the 5 most fragile economies of the world., because it was passing through the worst scenario of twin deficit, as both fiscal deficit as well as Current Account Deficit (CAD) in Balance of Payment were at their peak. It’s believed that Government has given stability to the economy by controlling these deficits.
In addition, International Monetary Fund (IMF) has estimated India’s Per Capita Income on Purchasing Power Parity (PPP) Basis at US$ 7170 for 2017, up from US$ 6690 in 2016. After this report of IMF, though our Per Capita Income remains lowest among BRICS nations, India has moved to 126th position from 127th position an year ago. In the present day world, which has been facing recession, improvement in credit rating and increase in Per Capita Income, surely indicates towards strengthening of Indian economy. Decisions of the Government being painted as disastrous are being called important reforms by the international rating agencies.
What makes this upgrade happen?
The reason for upgrade in rating after 13 years, especially when the same rating agency had termed Indian economy to be one of the most fragile economy merely four years ago, being given is economic reforms undertaken by this government, which have improved business environment and productivity. This may give a boost to investment both foreign and domestic and growth would become stable. Moody’s have also appreciated steps like Demonetisation, GST, Aadhar linking and Direct Benefit Transfer (DBT) etc.; as these steps would help limiting public debt and improve business environment. Moody’s has said the it may take time for benefits of Demonetisation and GST to be reaped and therefore in 2017-18, GDP growth may remain subdued at 6.7 percent, however, in years to come it will improve. According to Moody’s, disruptions caused by Demonetisation and GST would recede with Tim but benefits like limiting of public debt and increase in tax base may benefit economy in the long run. According to Moody’s due to compliance with Fiscal Responsibility and Budget Management (FRBM) Act, Constitution of Monetary Policy Committee etc., there is now an improved transparency in government policies. New Bankruptcy Act and Recapitalisation of the public sector banks, will reduce the risks for banking system.
Benefits of Improved Rating
When International rating agencies improve sovereign credit rating of a country, not only Government, even private companies start getting loans at a lower interest rate. Though, it’s true that most of the public debt in India is got from domestic sources, partially loans are also taken from abroad, mainly through External Commercial Borrowings (ECB). Therefore, not only for private sector, even cost of borrowing will come down for Government as well. Apart from reducing cost of borrowing, outgo of valuable foreign exchange will also come down. For a long time capital formation both by public sector as well private sector has slowed down, with reduced cost of borrowing due to improved credit rating, capital formation may get a boost. This may accelerate growth in GDP.
Improved credit rating by Moody’s mean that India’s economic position has improved based on international standards, indicating improved strength of Indian economy. Moody’s has not expected any big increase in growth in GDP in the short run, as in the short run, there have been some disruptions in the economy due to Demonetisation and GST, which may continue for some more time.
Tax receipts may also be lower, for some time from now. However, increase in number of income tax payers after Demonetisation and increased formalisation of Indian economy after GST, may help in increasing Tax-GDP ratio, due to increased number of tax payers. All this indicates at near future strengths of Indian economy and exchequer.
However, we need not be complacent about these claims, as we will have to deal with these short term problems also most efficiently. For that, important steps are needed to be taken, including reduction in interest rates, increase in private and public investment and last but not least increased outgo on education and health.
Question Mark on Ratings
If history is any guide, credit ratings of nations by these agencies are not always very honest and dependable; therefore, we need not get swayed by these ratings. It is notable that when these rating agencies were giving A2 rating to US in 2007, after only a few months their giant banks and financial institutions were going bankrupt. On the other hand, these rating agencies continued to have negative attitude toward India despite numerous strengths. It’s a matter of happiness that they have changed their mindset now and upgraded our credit rating at last.
We need to evaluate developing countries from their view point and not from the view point of developed world. Agencies like Moody’s, Fitch and others; look upon India from the angle of FDI coming from the western world. We must understand that development of India cannot happen by FDI alone. It can happen majorly by Indian enterprise, especially small enterprise, which provides employment and also promotes inclusive and decentralised development; which can only improve lives of common people. Government needs to go further to promote start ups and small scale enterprise. Along with encouraging investment, we need to encourage employment generation and environment protection too.
Today, all those economies which are termed as strong economies are suffering from huge inequalities; people are feeling more insecure than before, unemployment is at much higher and alarming levels. This raises question mark on to what extent rating agencies are dependable for determining about their economic well being.
(The author is Associate Professor, PGDAV College, University of Delhi)
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