Moody’s decision to upgrade India’s sovereign credit rating by a notch after a gap of almost 14 years is undoubtedly a welcome recognition of the country’s enormous economic potential. It has been driven by some of the recent structural reforms — including the implementation of a long-delayed nationwide goods and services tax (GST), and moves to address the logjam of mounting bad loans in the banking sector through an Insolvency and Bankruptcy Code. These are expected to help ensure a healthier enabling environment to realise this potential over the longer term. The ratings agency has said the reforms undertaken until now would “advance the government’s objective of improving the business climate, enhancing productivity, stimulating foreign and domestic investment, and ultimately fostering strong and sustainable growth.” And viewed in conjunction with the sizeable foreign exchange reserves, India’s overall capacity to absorb shocks is now seen as much better. The market reaction — with the stock indices and the rupee posting handsome gains intraday — signals that local businesses and overseas investors see the upgrade as a vote of confidence in the economy and the policy approach to economic management and reforms, especially at a time when momentum has slowed to a 13-quarter low.
Still, as Moody’s has flagged in explaining why it has opted to change the ratings outlook to ‘stable’ from ‘positive’, the “high public debt burden remains an important constraint on India’s credit profile relative to peers.” At 68% of its GDP in 2016, general government debt in India is significantly higher than the 44% median for other similarly ranked economies, according to the New York-based agency, which sees the debt-to-GDP ratio widening by about 1 percentage point this fiscal year to 69%. Moody’s cites “the large pool of private savings available to finance government debt”, the steps taken to enlarge the formal economy by mainstreaming more and more businesses from the informal sector, and measures aimed at improving spending efficiency through better targeting of welfare measures, as all broadly supportive of a gradual strengthening of the fiscal metrics over time. But it is this very same ‘time’ element that holds the key to how the macro-economic situation could evolve. With economists and monetary authorities warning of the likelihood of fiscal slippages as a consequence of farm loan waivers by States, the Centre’s implementation of the pay commission’s award and even weaker tax receipts amid teething issues with the GST, there is a danger that the government may end up missing its fiscal deficit targets in the near term. And therein lies the challenge. For the economy to capitalise on this upgrade, the political leadership must stay the reform course, electorally alluring temptations to resort to populism notwithstanding.