Discuss the reasons for, and the impact of, the recent sovereign ratings upgrade of India by International credit agency Moody’s.

Discuss the reasons for, and the impact of, the recent sovereign ratings upgrade of India by International credit agency Moody’s.

Approach:

  • Introduce with the ratings upgrade
  • Highlight the measures that influenced the upgrade
  • Explain how sovereign rating upgrade helps India
  • Conclude appropriately
Model Answer :

The global credit rating agency Moody’s Investors Services recently upgraded India’s sovereign ratings to Baa2 (from its lowest investment grade Baa3). It is the first ratings upgrade by Moody’s for India since 2004. It cited the Government of India’s wide-ranging program of economic and institutional reforms among the reasons for the move.

Measures that influenced the upgrade:

  1. GST:
  • The major tax reform, GST (Goods and Services Tax), has been implemented fairly smoothly, with good urgency shown and many political barriers crossed.
  1. IBC (Insolvency and Bankruptcy Code):
  • IBC is in place for tackling NPAs, and already major cases which have been referred to the tribunal and the resolution process is in progress.
  1. Recapitalization:
  • Banks have been recently recapitalised to ensure that they are adequately equipped to face the challenge of future growth in credit.
  1. Rationalisation of subsidies:
  • The rationalisation of delivery of public subsides was an achievement in efficiency with the UID (unique identity) scheme playing a major role.
  1. Others:
  • The power sector reform where the states took over Discom debt (under UDAY scheme), monetary policy reform though setting up of MPC (Monetary Policy Committee) etc. also helped.

What does a higher rating mean for India?

  1. Vindication of policies:
  • It is a vindication of all the policies implemented and measures undertaken by India to put the system in place and address all concerns of rating agencies.
  1. Eases borrowing:
  • A better rating will help Indian companies access global markets on more favourable terms, as sovereign rating is considered when interest rates are determined globally for overseas borrowers.
  1. Greater investment in India:
  • There could be a positive impact for foreign investors especially when the decision to allocate funds for any market or country is driven by the rating.
  1. Good for reputation:
  • From the point of view of reputation, the upgrade is helpful (though India is still underrated), especially as it comes at the time when the global economy is still in a tenuous state.

While the upgrade was very much logical, we need to be guarded as the rating is still in the BBB moderate risk category (it has moved from Baa3 to Baa2). The pace of reforms has to be kept up, and despite the coming elections, the fiscal deficit number have to be monitored well to ensure that there are few slippages.

Subjects : Editorials

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