This is an archive article published on November 18, 2017

Opinion A step up

Big lesson for India from sovereign credit rating upgrades: Stay the course on macroeconomic stability

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November 18, 2017 12:46 AM IST First published on: Nov 18, 2017 at 12:46 AM IST

The big lesson India can learn from sovereign credit rating upgrades is to stay the course on macroeconomic stability (File)

Moody’s Investors Service, on Thursday, raised India’s sovereign credit rating by a notch, from “Baa3” to “Baa2”, and also revised upwards its outlook for the country from “positive” to “stable”. The upgrading by the influential American credit rating agency comes after nearly 13 years, during which time India has attracted cumulative foreign direct investment flows of about $ 250 billion and net portfolio investments of over $ 225 billion into its stock and debt markets.

This period has, moreover, seen the country grow from a barely $ 620 billion to a $ 2.3 trillion economy, with its official foreign exchange reserves, too, soaring from some $ 110 billion to almost $ 400 billion. The question, naturally, arises: Why did it take so long to upgrade the ratings on bonds issued by the Indian government, which ultimately reflect the strength of its economy? Also, if foreign investors were willing to pour money into India without bothering much about Moody’s — the other major agency, Standard & Poor’s, incidentally, hasn’t changed its sovereign rating from “BBB-” (lowest investment grade) since January 2007 — how does any upgrade or downgrade matter? An upgrade can be helpful at times, particularly in the current context.

The last 4-5 months haven’t been great for the Indian economy, with global crude prices climbing from $ 47-48 to $ 60-61 a barrel and the merchandise trade deficit widening to $ 86.15 billion during April-October, against $ 54.49 billion for the same period of last year. Industrial growth has also been tepid at 2.5 per cent year-on-year during April-September, while consumer price inflation rose to a seven-month-high of 3.6 per cent in October. Add to these the revenue uncertainties from implementation of the goods and services tax (GST) — compounded by last Friday’s decision to drastically prune the number of items attracting the top 28 per cent rate — and it has made the foreign exchange and bond markets edgy of late. Just before the Moody’s upgrade happened, yields on 10-year government bonds had gone up from 6.46 to 7.06 per cent in the last four months, with the rupee also losing over 90 paise to the dollar. Moody’s, in a sense, has helped restore calm just when investors, especially in bonds, were starting to panic.

The big lesson India can learn from sovereign credit rating upgrades is to stay the course on macroeconomic stability. Concerns on it have been voiced in the past few months, with several state governments announcing farm loan waivers and the Centre under pressure to boost growth through fiscal stimulus measures. Focus on macro-stability and structural reforms (GST, bankruptcy resolution, replacing open-ended subsidies with direct benefit transfers etc) will certainly yield gains to the economy in the medium to long term. Whether or not it prompts an upgrade by rating agencies should be a secondary consideration.