The big economic news in the week gone by is global rating agency Moody’s changing India’s sovereign rating outlook from ‘stable’ to ‘negative’. The change in stance by an agency that just two years ago had raised India’s sovereign rating from near junk to two notches above junk should be a pointer to the powers that be that something is rotten in our economy.
But the reaction so far has been a defensive statement on how the Centre has “undertaken a series of financial and other reforms…”. It is obvious that ratings agencies and experts have taken the steps undertaken by the government into account while pronouncing their negative opinions. It is also obvious these worthies do not consider the recapitalisation of banks, relief for the automobile and realty sectors or the slashing of corporate taxes to be cause enough for celebration.
It is nobody’s case that these reforms are not welcome. They will yield results eventually, but the main disease that besets our economy—lack of jobs and demand—does not seem to have been addressed yet. Many economists believe demonetisation hit the informal and rural sectors badly.
The sectors have not been able to recover since then, creating a black hole where there was once a healthy demand for goods and services that kept India’s growth engine running. The lack of demand has seen corporate balance sheets weakening and shadow bankers falling by the wayside.
Moody’s itself has said the negative outlook “partly reflected government and policy ineffectiveness in addressing economic weakness”. Let us take the case of the recent relief measures for the realty sector—a fund with a corpus of Rs 25,000 crore created to cover the funding gap for unfinished housing projects.
It is estimated that this would cover about 6% of the funds actually needed for the 1,600-odd halted projects for which the money is intended. Even more worrying is the question in the minds of policymakers: Once these projects are completed, will there be enough demand for the stock of houses that would be put on the market?