Brew-Up Ideas Winning Entry- Great power comes with great responsibility: Rating upgradation by Moody

Great power comes with great responsibility: Rating upgradation by Moody

Author: Rohit Mallimadugula (SIBM Pune)

French writer Voltaire once said “With great power comes great responsibility”, and rightly so. The context in this case being the rating upgradation of India by Moody’s from Baa3 to Baa2, an upgrade which took 14 years. The question which arises now is why did it take 14 years for this incident to take place. The important factors that should be taken into account to understand this upgrade are change in the political scenario of the country over the years, macroeconomic factors like inflation, exports and imports, and ease of doing business in India and last but not the least GST. From 2004-14, India was having a government formed by UPA(United Progressive Alliance)and Prime Minister Mr.Manmohan Singh. During that phase India’s demography was undergoing a structural change with 65% of its population coming under the category of being less than 35 years old. For development and growth of the country during that decade two of the most essential factors were education and employment. For education, UPA(United Progressive Alliance) had initiated Right to education which failed to deliver on quality and coming to employment, its performance on the job front was abysmal. In the 10 years of their governance, they had created only about 15 million jobs where the government prior to that created 58 million jobs from 1999-2005.

Inflation  in 2004 was 3.78% when the UPA reign started and was 5.86% in 2014. During these years there were some years where the inflation reached double digits like 14.97% in 2009, which shows that the government was unable to maintain a standard rate whereas the inflation in the recent years has been much more stable with 2.19% in 2017. Though there was economic growth in the country during the UPA reign with rise in GDP, FDI and Exports, this growth was hindered by corruption and scams like Coalgate and  2G  which made India holistically unworthy of upgradation in the rating by Moody’s.

The current government i.e. NDA (National Democratic Alliance) which is led by our honourable Prime Minister Mr. Narendra Modi and chairperson of the party Mr. Amit Shah were able to bring in some changes into the system which made Moody’s change their mindset on India. One of the important factors have been that the party have been principally driven by Mr. Modi to reduce corruption and improve employment in the country. To establish his principles into the system, the first big step was demonetization of currency which created a havoc in the country for about a month since its inception but over the course of time it had reduced the amount of black money in the economy. Moody’s believe that GST, demonetization, UID, direct benefit and new monetary policy system have strengthened economy. GST, I believe is one of the major talking points as it has had a direct impact on FDI and exports, as now exporting becomes cheaper due to the reduction in No. of indirect taxes into one GST  which in turn reduces the cost of logistics and supply chain, the same reason which contributes to the improvement of DBI rank of India and hence increase in FDI .Now, among BRICS nations, India stands higher than Brazil, Russia, and South Africa but lower than China (who stands 5 notches higher at A1). Due to this, cost of borrowings for corporate and banks will come down. In its former rating of Baa3, the range for cost of borrowing was 4.3% and 9.3%. With the new rating, India entered the club of countries like Spain, Italy, Philippines and the cost of borrowing decreased to 1.5% to 4.9%.

Its impact on the government spending is that this upgradation is going to put an upward pressure on Rupee( impact of too much of FDI) which is already being said overvalued. Exporters might not be happy with this. Moody’s has already warned that a huge amount of fiscal deficit would put negative pressure on rating so this will force the government to maintain the center fiscal deficit at 3.2% and combined fiscal deficit of center and state at 6.4%. There is utmost urgency in terms of external vulnerability as the oil prices is on a rise which might affect the import and in turn the fiscal deficit is affected. In a nutshell, the Moody’s rating is seen to positive in financial term but it has increased the burden and restricted the Government to maintain this level.

It has also emphasized the importance of banking system due to which the recapitalization of Rs.2.11 trillion has been allocated to the Public Sector Banks (PSB’s) over the course of 2 years for helping the banks improve its Capital Adequacy Ratio(CAR) and lending capacity. For better rating, India must concentrate in reducing the stressed assets in banks which will happen only if there is a proper system in  place and there is no political interference in the system. India can improve its rating if it continues to stay on the path of fiscal consolidation and control its debt. According to Moody’s  India uses 68 percent of  its GDP to cover its debt whereas it is a median of 44% for a country with Baa rating. So this is factor to be aware of as increase in debt would damage the chance of further upgradation. The current long term challenge though is job creation. If the services and the industrial sectors expands at a faster rate it will help reduce unemployment to a large extent. Stressing on more institutional reforms and implementation of key pending reforms in the areas of  land and  labour laws will help India in getting an upgrade by Moody’s. But the current political situation does not allow Mr.Modi  to use his political capital in undertaking tough and  unpopular reforms like relaxation of land acquisition rules and flexiblity in the labour law regulations.

I would conclude that though there is a plenty of development and reforms required, there is also a lot to cheer for India right now, given the fact that Modi’s government must follow similar lines in the future so that it highlight’s the growing potential in India which would in turn increase employment, FDI and FII. Consistently doing this over the years would help India enormously in upgrading its rating and competing with countries like China and become a force to reckon with.

 

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