The lowering of the sovereign credit rating outlook of India from stable to negative by Moody’s, though not really justified at this point, is a grim reminder of the state of the economy and the need to accept that all is not well.
The lowering of rating outlook does not seem to be justified because the conditions that have been highlighted for change in outlook have been known for quite some time now. Also, the fact that the government has been addressing various issues sequentially has not been considered by the rating agency, which could be a bit disappointing. It is true that the financial sector does not look strong. However, the capitalisation of public sector banks (PSBs) and the gradual reduction in non-performing assets (NPAs) has been positive and those should have been considered. That apart, while the NBFCs are struggling, the measures taken by the Reserve Bank of India (RBI) and government should ideally have been weighed in before changing the outlook.
However, credit rating agencies have their subjective methodologies and perspectives in place when doing such an analysis and also matters to the global community. This is why we should be cognizant of their views since if India ever plans to raise a sovereign bond, such a rating would matter. It is also critical for Indian companies which access global markets and the spurt seen in external commercial borrowings (ECBs) can get affected through this country rating.
Presently, it is hard to point a finger at the government for not trying to address issues as the Finance Minister (FM), in the last two months, has introduced a slew of such measures that will admittedly take time to fully play out. True, growth in gross domestic product (GDP) has slowed down and the 8 per cent number is a distant picture right now. With growth perspectives being moderated on India by multilateral agencies as well as RBI at least up to FY21, it will be a slow climb upwards. But, this also means that the government has to be more cautious on the fiscal side. Presently, Moody’s had expressed some concern on the debt levels of the country but any slippage on this side would definitely be negative from a rating perspective. Given that the Budget was drawn up based on some strong assumptions, possibilities of slippage are high especially after the corporate tax relief that was meted out some time back. It is all the more important that the government expedites the disinvestment programme and ensures tax revenues pick up or there may have to be cuts in discretionary spending by the end of the year to meet the fiscal targets.
A change in outlook is definitely not as serious as change in rating band (which remains at Baa2), but a negative view can be a precursor to a change in the rating. The basic economic numbers like GDP growth, inflation, credit growth etc. are unlikely to change significantly in the next six months. This is what it is all the more important that the government--both Centre and States be cautious fiscally. The rural sector has to be monitored because the prolonged monsoon has affected the kharif crop which can lead to farmers’ distress once again which will add to the rating agency’s concerns.
The external front is strong, and unfortunately has not been used by Moody’s to balance their view on the sovereign rating. The high flows of foreign direct investment (FDI) and foreign portfolio investment (FPI) to an extent do vindicate the promise shown by the economy. It has pointed to the local factors that have worked on its decision to change the outlook. Therefore, this is something more within the control of the government that can be tracked and addressed.
(Madan Sabnavis is chief economist at CARE Ratings. Views expressed in this article are personal.)