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Moody’s negative rating for India

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November 11, 2019

Why in News?

Rating agency Moody’s has revised the outlook on its sovereign rating for India from stable to negative.

Why this rating for India matters?

  • Moody’s India rating is a notch higher than that of Standard & Poor’s (S&P).
  • The outlook revision of the rating now may well be to compensate for its past optimism on India.
  • Yet, the outlook revision has to be seen as a warning that if the economy fails to bounce back soon enough, the sovereign rating could be up for an unfavourable review.
  • With due respect to Moody’s, none of the issues that it has highlighted is unknown.

What are the concerns?

  • The growth slowdown and its effects on the fiscal deficit and borrowings are the main worries.
  • Tax revenue growth is nowhere near budgeted levels.
  • With the slowdown extending into the third quarter of 2019, it is clear that tax revenues will undershoot by a wide margin.
  • The government has been forced to spend more to give a leg up to the economy.

What are the projections?

  • Efforts - The government pushed its expenditure on capital projects.
  • In October 2019, it gave away corporate tax concessions amounting to a whopping ₹1.45 lakh crore.
  • Even with the boost from the dividend payout of ₹1.76 lakh crore from the Reserve Bank of India, the budget arithmetic is optimistic.
  • Fiscal deficit - It now appears certain that the government will miss the fiscal deficit target of 3.3% of GDP.
  • Moody’s has projected that the deficit will slip to 3.7% of GDP this fiscal year 0f 2019-2020.
  • Rating agencies are ultra-sensitive to fiscal deficit overruns but the positive factor here is that India’s borrowings are wholly domestic.
  • External debt to GDP - It is just 20% but the ratings do have an impact on investor sentiment.

When will the revival take place?

  • Moody’s outlook revision comes when there are faint signs of a revival in the economy.
  • It may be another quarter or two before growth picks up - the second-quarter numbers due in November 2019 may show GDP growing at less than 5%.
  • But the festive season uptick in sales of automobiles and white goods does point to the return of the consumer to the market.
  • Of course, the possibility that it was an artificial boost driven by the big discounts that were on offer cannot be ruled out.
  • There are other positive signals such as the increase in bank credit off-take reported by the RBI for the second successive fortnight.

What could be done?

  • The government needs to press the pedal harder on reforms and in debugging GST.
  • It may also have little option than to go big on disinvestment in the remaining 4 months of this fiscal.
  • The target of ₹1.05 lakh crore that it set for itself in the budget has to be bested by a wide margin if the fiscal deficit slippage is to be contained.
  • The supportive measures announced in the last 2 months should be closely monitored for implementation.

 

Source: The Hindu

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