JOIN USSome reassurance, but heed the warning
The upgradation of India’s outlook by ratings agency Moody’s from negative to stable provides some reassurance about the economy at least in the short term. The agency has appreciated India’s recovery after the disruption caused by the pandemic, and the rating enhancement is based on its view that the “risks from negative feedback between the real economy and the financial system are receding.” It has also said that “with higher capital cushions and greater liquidity, banks and non-bank financial institutions posed much lesser risk to the sovereign than previously anticipated.’’ The agency has revised its growth forecast to 9.3 per cent in the current fiscal year and 7.9 per cent for the next year. It also feels that the recovery is unlikely to slip badly but may stabilise at 6 per cent in the medium term. There is also a good accumulation of foreign exchange and that makes the external position strong. But it must be noted that the ratings are at the lowest investment grade.
A downgrade below the investment grade would have hurt the country badly. International investors go by the ratings of agencies and do not invest in countries that are below the grade. Among the three big rating agencies, both Standard & Poor’s and Moody’s have raised the outlook to stable, but Fitch continues to maintain a negative view. But the favourable ratings should not lead to complacency in economic management. Though there was a quick recovery from the second wave of the pandemic, the economy still faces serious risks. At the end of 2021-22, the real output of the economy will be only slightly more than its pre-pandemic level of 2019-20. The present recovery rate is high because it is made from a very low base. Going forward, it is going to be tougher.
There are many challenges ahead. The economy was slowing down even before the pandemic struck. Some of the factors that had slowed it down still exist, and might even get accentuated. It will take much longer for the informal economy to recover from the effects of demonetisation and the pandemic. Private consumption and investment remain subdued. Individuals and households will not be able to spend much, and without consumer demand, private investment cannot grow. Government spending will also not rise substantially, especially when there is a high level of public debt. The debt-to-GDP ratio is a constraining factor in public expenditure. Exports are doing well and that augurs well. Moody’s has issued a warning too, by stating that the sovereign's fiscal strength could weaken further, leading to a negative rating action if the debt situation does not improve. That should be heeded.