Government has suggested that Moody’s rating upgrade for India reflects the impacts of structural reforms and fiscal discipline.
The rating agency’s optimistic view of India should be seen in perspective.
What were the reforms & acknowledgements?
The structural reforms ushered in include - implementing GST, constituting the Monetary Policy Committee (MPC), and setting up an Insolvency & Bankruptcy code (IBC).
Moody (rating agency) had stated that the transition to GST involves a short-term growth trade-off for medium-term gains.
It hence expects India to grow at just about 6.7% in 2017-18, but pick up in the subsequent years.
Notably, India also saw a rankings jump of 30 places in the World Bank’s ‘Ease of Doing Business Index”.
For all this, a streamlined indirect tax system, ease of sale and purchase of business assets and macroeconomic stability are essential.
Formalising the economy by promoting cashless transactions and extending the Aadhaar platform are also integral to these reforms.
Along with GST, such steps are expected to expand the tax-to-GDP ratio beyond the current level of 16%.
What are the challenges ahead?
Despite the optimistic outlook, there are immediate concerns on the macroeconomic front for India.
Oil Prices - Rising oil prices and hiccups in the transition to GST can affect tax collection and put the fiscal and current account deficits under strain.
Passing on the higher fuel prices to the consumer looks politically difficult currently, when the Centre is already dealing with rising retail inflation.
Fiscal Targets - The pressure to not deviate from the fiscal deficit target of 3.2%, notwithstanding uncertain revenues is immense.
Notably, many committed expenditures such as Pay Commission disbursements and bank recapitalisation are pending.
The finance minister’s emphasis on fiscal targets suggests that growth may have to depend more on bank lending than public spending.
Rating Fallacy - The Centre, should not get carried away by rating assessments which often take a one-size-fits-all view on market assessments.
Notably, their failure to call out toxic mortgages in 2008 that precipitated in the sub-prime crisis dented their credibility.
