The Economic Survey 2016-17 brings out bias in perception about the Indian economy by international credit rating agencies (CRAs). Against the backdrop of the debate whether India’s credit ratings deserve an upgrade or not, Moody’s has finally upgraded India’s ratings from positive (Baa3) to stable (Baa2), after a gap of 13 years. Moody’s cited various reasons for this upgrade, viz. change in taxation regime with the introduction of the goods and services tax (GST), the Insolvency and Bankruptcy Code to resolve bankrupt cases, institutional reforms in the form of India’s aggressive stance for a less-cash economy and following fiscal consolidation path.
This is the second positive news about the economy after achieving 100th rank on World Bank’s Doing Business indicators by moving up 30 places in one year.
CRAs look at indicators such as debt ratio, FDI inflows, fiscal and current account balances before rating the investment in a borrower country by estimating the country’s ability and willingness to pay its debt and likelihood of default. International ratings play an important role for governments and companies in emerging countries like India to raise capital in the international financial market and attracting investments from abroad. A lower credit rating means higher cost of borrowing through risk premium and lower investors’ base. Though the credibility of CRAs has moderated during the post financial crisis where AAA-rated investments defaulted, their importance has, by no means, diminished.
The debate behind India’s upgrading reignited earlier this year when Standard & Poor’s (S&P) upgraded China’s ratings but did not upgrade India’s ratings despite improvements in macro fundamentals. Chief Economic Advisor Arvind Subramanian pointed out the inconsistent standards of CRAs, particularly dealing with India and China. With regard to the performance of the Indian economy in the recent years, India’s total gross debt-to-GDP ratio has reduced by around 15%, from 83% in FY04 to 68% in FY16. India’s debt is mostly dominated by internal public debt, with little share of external debt. Many countries have been experiencing a deterioration of their debt-to-GDP ratio, and with high external debt-to-GDP ratio such as Japan, Singapore, the US and Spain with a debt-to-GDP ratio of 239.2%, 112%, 107% and 99%, respectively, in 2016. India’s debt-to-GDP ratio is substantially lower. However, CRAs don’t downgrade ratings of these countries because of their sound financial market, capacity to absorb shocks and other macroeconomic fundamentals.
India’s GDP has grown moderately and is expected to grow at 7.4% in FY18, according to IMF projections. Along with this, inflation has remained relatively stable and national savings have increased moderately. India’s fiscal deficit has remained relatively stable. The important aspect of fiscal stability is primary balance, the difference between receipts and non-interest expenditures, which has been improving as the gross primary deficit decreased from 4.5% in 2009-10 to 1.6% GDP in 2015-16.
On the external front, the current account deficit has improved significantly from an alarming level of 4.8% in FY13 to a mere 0.7% in FY16. The foreign exchange reserves, too, have shown positive prospects in the post-crisis period, with forex-to-external-debt and forex-to-GDP showing improvement. On its comparison with other emerging economies, India is stable and is one of the fastest-growing economies worldwide. This positive outlook has translated in boosting investor sentiments over the past few years. Hence, it is clear that the recent developments in the Indian economy justify a ratings upgrade.
Benefits to upgrading
Given that India has never defaulted on its obligations even in its worst crisis, it clearly exhibits the Indian economy’s ability to repay its debts and remain solvent. Further, the economy has shown its capacity to finance large external deficits by securing its financing in the form of more stable capital flows such as foreign direct investments. The upgrade in ratings by Moody’s will benefit the country in many ways. India is a capital-scarce economy and, given the improvement in ratings, it will be easier to attract capital from abroad, which, in turn, will help fuel economic growth further. Second, investments now could be attained at a lower borrowing cost, as the risk premium on credit will be reduced. Third, external deficits now could be financed easily and at a lower cost, and surge in investment will help improve the stock market performance of the economy as well.
While Moody’s has upgraded India’s ratings, there are still some concerns. India’s trade deficit widened to a three-year high to around $14 billion in October. The increase in deficit can be mainly attributed to decline in exports and increase in imports in Q1 of the current financial year, mostly due to setback to supply chain because of demonetisation and GST. Exporters are faced with liquidity crunch due to GST implementation and issues like delay in refund of tax credit. The current account deficit also increased to a four-year high in the April-June quarter, mainly due to increase in gold imports as well as oil prices started to pick up.
The improvement in current account and fiscal deficit in the last few years is primarily on account of positive external shock in the form of oil price crash, from $106 per barrel in July 2014 to $26 in January 2016, not because of surplus in trade balance. Oil prices have picked up quite substantially in the last one year and are expected to continue the trend. Further, the ratio of foreign exchange reserves to total debt decreased from 115.6 in 2007 to 74.2 in 2016, whereas external debt-to-GDP ratio also marginally increased from 17.5% to 23.7%. Though we improved on fiscal stance, India’s receipts are still not sufficient to meet non-interest payment expenditures.
While there are concerns, international rating agencies have been unfair to India so far and upgrade by Moody’s reflects the stability of the Indian economy and positive investors’ sentiments, with a stable political environment. The growth potential and improved macro fundamentals should reflect in the ability and willingness to repay debt. India deserved an upgrade in its rating on its own right, and this upgrade will help attract investment for sustaining higher growth without worrying about solvency and related risks.
Source: financialexpress.com