Moody's backs Modi, upgrades India's sovereign rating for first time in 14 years

NEW DELHI: International rating agency Moody’s Investors Service has upgraded India’s sovereign bond rating for the first time in nearly 14 years, endorsing structural reforms undertaken by the Narendra Modi government that it said will boost growth and reduce the debt burden.

The agency lifted the country’s rating to Baa2 from Baa3, the latter being the lowest investment grade rating, and changed its rating outlook to stable from positive as “risks to its credit profile were broadly balanced”.

Moody’s upgrade, its first since January 2004, moves India’s rating to the second-lowest level in the investment grade category. Standard & Poor’s has kept India at the lowest investment grade just above junk status for a decade and Fitch Ratings for one year longer.

Senior ministers said the upgrade was recognition and endorsement of the government’s policies and reforms.

“I’m sure that many who had doubts in their minds about India’s reform process would now seriously introspect on their own positions,” finance minister Arun Jaitley said.

The upgrade is the second big boost to the Modi government that has faced criticism after economic growth plunged to a three-year low in the April-June quarter.

Earlier this month, the World Bank lifted India’s ranking on ease of doing business to 100 from 130.



India’s sovereign credit rating upgrade cheered stock markets with the BSE Sensex 235.98 points, or 0.71% up, at the end of trade while the 50-share Nifty closed 68.85, or 0.67%, up.

Moody’s said the reforms implemented will improve the business climate, enhance productivity, stimulate foreign and domestic investment, and ultimately foster strong and sustainable growth.

It listed gains from GST and demonetisation while acknowledging these steps have hit growth this fiscal. This upgrade is expected to boost foreign capital inflows into the country as also bring down overseas borrowing cost for domestic companies.

Sovereign ratings gives investors insight into the level of risk associated with investing in a particular country including political risks.

“This upgrade has happened after 13 years. We welcome this upgrade… We believe that it is a belated recognition of all the positive steps which have been taken in India in the last few years that have contributed to the strengthening of the economy,” Jaitley said.

Industry said the upgrade was a recognition of transformational reforms.

“The ratings upgrade underlines the efficacy of the bold structural reforms undertaken by the government in recent years. It clearly shows that the economy is turning the corner and is poised for a big leap forward, highlighting the immense potential that India offers as a global investment destination,” said Sunil Bharti Mittal, chairman, Bharti Enterprises.

Prem Watsa, chairman of Fairfax Financial Holdings based in Toronto, also welcomed the news.

“That is terrific,” he said, referring to therating upgrade and citing the World Bank’s latest Ease of Doing Businessreport, in which India jumped 30 places. “The possibilities for India in the next 20 years are dramatic. India has massive potential.

If you think of the next three to six months, (that) the economy is slowing a little because of demonetisation, you’ll miss the idea. Look at it long term,” Watsa said.

Praising PM Modi’s leadership, he said, “India is very fortunate to have a leader who is focused on the country and not on himself.”

Chief economic adviser 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”, Subramanian told reporters.

Economic affairs secretary Subhash Chandra Garg said the upgrade has recognised government efforts on the fiscal deficit, consolidation and debt control.

Deterioration in fiscal situation or in the health of banking sector and a rise in external vulnerability are possible risks to the ratings.

REFORMS RECOGNISED
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 over the medium term.

Reforms such as the Goods and Services Tax (GST) will promote productivity by removing barriers to inter-state trade.

It expects GDP growth to take a hit to 6.7% this year due to impact of GST and demonetisation, but sees it strengthening to 7.5% next fiscal. “Longer term, India’s growth potential is significantly higher than most other Baa-rated sovereigns,” said Moody’s.

Improvements to the monetary policy framework, measures to address the overhang of non-performing loans (NPLs) in the banking system and measure like demonetisation, the Aadhaar system of biometric accounts, and targeted delivery of benefits through the direct benefit transfer (DBT) system are intended to reduce informality in the economy, Moody’s said.

India’s reforms programme will thus complement the existing “shock-absorbance capacity” provided by India’s strong growth potential and improving global competitiveness, it said.

While India’s high-debt burden remains a constraint with regard to the country’s credit profile, Moody’s said reforms put in place have reduced the risk of a sharp increase in debt even in a potential downturn scenario.

The debt burden is expected to increase one percentage point to 69% this fiscal. It will start declining after remaining stable for a few years as economy grows and measures to enhance revenue and expenditure efficiency take effect.

Jaitley said the government will maintain fiscal discipline, stating that the government “intends to stay the course on fiscal consolidation in the medium term”.

Government has budgeted fiscal deficit of 3.2% of GDP for current fiscal.

The rating agency said important measures which have yet to reach fruition include planned land and labour market reforms, which rely to a great extent on cooperation with and between the states.

“Most of these measures will take time for their impact to be seen, and some such as GST and demonetisation have undermined growth over the near term,” it said.

Industry body CII said this upgrade comes as a major boost to market sentiment on India and a recognition of the transformational reforms being conducted by the government.

“It reaffirms our belief that measures such as GST, doing business and bankruptcy reforms, public spending on infrastructure, reduced use of cash and banking reforms have all contributed to the rating upgrade. CII would like to commend the government on the upgrade,” CII director general Chandrajit Banerjee said in a statement.