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Millennium Post

A note of caution

Lowering of India's sovereign rating by Moody's and slowing of economic growth to an eleven-year low cumulatively flare a warning for India. The foremost takeaway from these two assessments is that though they have surfaced during the pandemic which has evidently dampened economic spirits, their assessment period precedes it. While the NSO-released GDP figures are for the fourth quarter (Jan-March) of the last financial year, rating agency Moody's conspicuously mentioned that the downgrading is not driven by the pandemic's impact. In fact, it stated a slow reform momentum, constrained policy effectiveness and slower growth relative to India's potential as reasons for the downgrade from 'Baa2' to 'Baa3' — lowest rating in investment grade. It is to be noted here that it was Moody's back in 2017 which had upgraded India's rating to Baa2 on account of landmark reforms such as GST and IBC amid others. It was the prospect of continued economic and institutional reforms that had convinced Moody's of India achieving high growth potential. But by reversing its stance back to what it was in 2017, it is clear that the potential was squandered in Moody's perception. Moody's has merely aligned its rating with others (S&P, Fitch) who did not resort to a rushed decision and maintained the status quo. While the downgrading may be fodder for criticism pointed towards economic policies of the government, it serves as an opportunity to run a comprehensive impact-assessment of policies in place. Unless the government deliberates on reasons for the pre-pandemic slowdown of 2019, it will not be able to register a high-growth trajectory in future. Moody's expects India's real GDP growth to contract by 4 per cent in current fiscal (due to the pandemic and lockdown) and then register 8.7 per cent in the next. But thereafter, it does not see India clocking higher rates as before in the long term largely due to lower job growth, weak private sector investment and stress in the financial system. In fact, it observes this financial stress to increase leading to a higher debt burden. While the debt burden will climb due to coronavirus shock, the government may find it difficult to reduce it effectively, owing to its stemmed capacity in the wake of relatively lower GDP growth than in past. Though this is a mere prediction of the current trend, economies and markets run on trends. It is therefore significant that the government gets hold of these disturbing trends in order to remedy the downfall.

One of the reasons stated by Moody's for the downgrading of India's sovereign rating reflects the fault in our policies. The rating agency was of the view that "country's policymaking institutions will be challenged in enacting and implementing policies which effectively mitigate the risks of a sustained period of relatively low growth, significant deterioration in the general government fiscal position and stress in the financial sector". Having said that, Moody's held a negative outlook to its ratings similar to last year. The downgrade simply increases the overseas borrowing cost for banks. But more than what it does to India's prospects, how it affects policymakers and decision-takers is more important. After all, these forecasts and assessments largely signal the impacts that our policies make. An already slowing economy stressed with the persistent NPA problem — notwithstanding IBC — forced to overshoot its fiscal deficit targets on account of the pandemic is a recipe for disaster. Contrary to what Moody's may expect, policymakers have to step up and mitigate the worsening trend. Positive or negative, indicators are a reflection of the kind of trajectory we record based on our policies. The rudder still rests on the government's hands and hence, it is very much upon the government to turn the grim situation to its advantage and tap upon opportunities available through swift governance eyeing lofty outcomes with earnest implementation.

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