S&P ratings prove India can't get carried away by Moody's view of the economy
Two country ratings by the world’s biggest ratings agencies have been a subject of hot discussion in the past two weeks. On November 17, Moody’s Investors Service upgraded India’s sovereign rating by a notch in what was widely considered as an endorsement of the Narendra Modi government’s reforms policy. Moody’s raised the rating from the lowest investment grade of Baa3 to Baa2, and changed the outlook from stable to positive.
It’s the first upgrade of India’s rating in 14 years. Explaining the reason for the upgrade, Moody’s said it was driven by its expectation that continued progress on economic and institutional reforms will, over time, enhance India’s high growth potential. Of particular mention were GST and the Insolvency Law, which is expected to address the issues of winding up companies and dealing with the huge quantum of non-performing assets with banks more definitively.
The government was quick to pat itself on the back, while critics, including the Opposition Congress, were of the view that the ratings should also have taken into account the tremendous pain the economy went through, first from demonetisation and later, from an alleged faulty implementation of GST.
Standard and Poor’s (S&P), which came out with its India rating on November 24, was a little more cautious in its outlook, and perhaps reflected what critics of the Modi government had been pointing out so far.
S&P kept its India rating unchanged at the lowest investment grade of BBB–, with a stable outlook, citing a sizeable fiscal deficit, high general government debt and low per capita income. S&P said the stable rating outlook reflects its view that over the next two years, India’s growth will remain strong. S&P last upgraded India’s sovereign rating to BBB– from BB+ in January 2007. Experts say that S&P had been conservative on this front since it assigned a higher weight to fiscal consolidation, including that of the individual states. Moreover, it would like to see the results of the government reforms coming in before it goes in for a rating revision.
The country ratings (also called sovereign ratings) are important because they give foreign investors an indication on the current investment climate in a country, as is reflected in the various reforms undertaken by its government.
Not long ago, the World Bank had given India a rank higher by 30 notches in the annual Ease of Doing Business rankings, taking into consideration some reforms implemented under various heads, including starting a business, dealing with construction projects, getting electricity and getting credit, among others.
Notwithstanding all these, there is still a lot of work to be done. One thing that has perplexed many over the years is the reason why rating agencies kept India’s ratings on the lowest side for a long time, despite the country managing well when it comes to its macro economic fundamentals — the improvements in the current account deficit, the high forex reserves, as well as the relaxations in the FDI policy over the years.
The reason, according to some experts, is that the sovereign rating methodology factors economic and institutional strength, fiscal performance and susceptibility to risks. GDP growth, volatility of growth and per capita income have a major say in the assessment of the economic health of a country and the subsequent rating, they say. But despite the good cheer for the government for its reforms, it should not lose sight of some of the real issues on the ground — the body blow that demonetisation has dealt to small businessmen, the confusion around GST, the volatile oil prices that can upset the fiscal balance any day, and last but not the least, the real, on- ground situation in the ease of doing business.
For instance, in the critical sectors of power and steel, there are hardly any new capacities that are coming up. While there is already a huge oversupply in the power sector, with power plants forced to run way below their originally planned capacities, in the steel sector, there is an acute shortage of financing for new projects. Except for a very large player like JSW, no one is willing to risk building new capacities.
Moreover, several plants are being referred to the National Company Law Tribunal for the insolvency process, making the steel industry a soft target for takeover. With new capacities being deferred, where will jobs be created from? Manufacturing can be a large creator of jobs if only there is enough incentive to expand businesses and hire more staff. From that point of view, S&P seems to have taken a judicious view. It would rather wait for the race to end to decide the winner than announce the winner at the start of the race.
(Courtesy of Mail Today)