Post demonetisation and GST, PM Modi gets Moody’s boost with rating upgrade

New York-based global ratings agency Moody’s Investors Services upgraded India’s sovereign ratings from the lowest investment grade to a notch higher.

Reforms like Goods and Services Tax (GST) will promote productivity by removing barriers to interstate trade, said Moody's.

CHENNAI: A day after a Pew Research Centre survey showed that Prime Minister Narendra Modi’s popularity has surged despite controversial decisions such as demonetisation, New York-based global ratings agency Moody’s Investors Services on Friday upgraded India’s sovereign ratings from the lowest investment grade to a notch higher.

The move is significant on two counts — it comes after a hiatus of 13 years and shows the growing international recognition of Indian’s growth prospects. The stock markets reacted positively to the development with the Sensex jumping 236 points and Nifty scaling 69 points on Friday.

Experts view the ratings upgrade — the first such move by Moody’s since January 2004 — as an acknowledgement of the government’s bold decisions to trigger growth through disruptive measures such as note ban, GST rollout and the steps taken to resolve the bad loans issue, among others.

What are these ratings?

Sovereign credit ratings give investors insight into the level of risk associated with investing in a particular country and also include political risks.

What do Baa3, Baa2 denote?

Baa3 is the lowest rating of investment grade Moody’s Long-term Corporate Obligation Rating. Obligations rated Baa3 are subject to moderate credit risk.

Reason for India’s upgrade

Moody’s feels while the govt is still unleashing reforms, those implemented can improve the business climate and stimulate FDI, causing sustainable growth.

Explaining the rationale for upgrading the rating to Baa2, Moody’s said: “The (Indian) government is mid-way through a wide-ranging programme of economic and institutional reforms.

While a number of important reforms remain at the design phase, Moody’s believes that those implemented to date will advance the government’s objective of improving the business climate, enhancing productivity, stimulating foreign and domestic investment, and ultimately fostering strong and sustainable growth.

“The reform programme will thus complement the existing shock-absorbance capacity provided by India’s strong growth potential and improving global competitiveness.” Notably, the New York-based agency has also changed its outlook on the country’s rating from ‘positive’ to ‘stable’. The latter move will help India attract more foreign funds while domestic companies will be able to raise funds abroad at lower rates.

Among the key reforms of the Modi government that Moody’s counts as promising are GST, which it thinks would promote productivity by removing barriers to inter-state trade; measures to address the overhang of non-performing loans in the banking system; and bold measures such as demonetisation, targeted delivery of benefits through Direct Benefit Transfer, and Aadhaar.

While the ratings agency acknowledged that most of these measures would take time for their impact to be seen, it pegged India’s real GDP growth at 6.7 per cent in the fiscal ending March 2018.

“However, as disruption fades, assisted by recent government measures to support SMEs and exporters with GST compliance, real GDP growth will rise to 7.5 per cent in FY2018, with similarly robust levels of growth from FY2019 onward,” it said.

According to Moody’s, India’s long-term growth potential is significantly higher than most other Baa-rated sovereigns.