What is the issue?
- 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.
Source: Business Line
