Moody’s swing

American credit rating agency Moody’s has finally acknowledged that the Indian economy is “stable”. This is the first upgrade since 2004, when Moody’s had placed the country at the lowest investment grade after lifting it a notch above “junk” status. The timing of the upgrade is, however, curious. The agency did not buy India’s growth story when the country was the fastest growing economy in the world. Even last year, it summarily rejected senior finance ministry officials’ contention that the agency had failed to appreciate several economic reforms undertaken by a stronger and decisive government since mid-2014. Moody’s stubbornly kept India’s position unchanged last November, leading to North Block raising doubts about its ratings methods. It has now, finally, found India fit to be a stable economy although the country’s growth rate has plummeted to a three-year low, banks are still laden with non-performing assets and the country’s informal economy has been badly hit because of twin disruptions — demonetisation and hasty implementation of the GST. 

Probably, Moody’s had been overcautious in the past, hence this 13-year pause. Although the rating came late, the upgrade will certainly help India in reducing the cost of capital and further boosting confidence of potential foreign investors. Pained by the delay Chief Economic Adviser Arvind Subramanian instantly reacted that “it was long overdue”. Indeed, through this upgradation the rating agency has acknowledged some path-breaking reforms such as GST, recapitalisation of public sector banks and direct transfer of subsidy to bank accounts of the beneficiaries. The Modi government has been able to successfully contain inflation below 4 per cent even at the cost of growth, which shows its resolve to stay the course on fiscal consolidation.  

Finance Minister Arun Jaitley has welcomed the upgrade as a global recognition to major economic and institutional reforms undertaken by the Modi government. However, a note of caution has to be entered. No undue importance to such global recognitions be given; after all Moody’s stubbornness for 13 years could not hinder India’s economic progress. Domestic accolades and satisfaction are more precious than global rankings. The government must take steps to revive the shattered domestic informal sector, which is a provider for millions of poor Indians.