Moody’s negative rating for India

Why in News?

Rating agency Moody’s has revised the outlook on its sovereign rating for India from stable to negative.

Why this rating for India matters?

Moody’s India rating is a notch higher than that of Standard & Poor’s (S&P).
The outlook revision of the rating now may well be to compensate for its past optimism on India.
Yet, the outlook revision has to be seen as a warning that if the economy fails to bounce back soon enough, the sovereign rating could be up for an unfavourable review.
With due respect to Moody’s, none of the issues that it has highlighted is unknown.

What are the concerns?

The growth slowdown and its effects on the fiscal deficit and borrowings are the main worries.
Tax revenue growth is nowhere near budgeted levels.
With the slowdown extending into the third quarter of 2019, it is clear that tax revenues will undershoot by a wide margin.
The government has been forced to spend more to give a leg up to the economy.

What are the projections?

Efforts - The government pushed its expenditure on capital projects.
In October 2019, it gave away corporate tax concessions amounting to a whopping ₹1.45 lakh crore.
Even with the boost from the dividend payout of ₹1.76 lakh crore from the Reserve Bank of India, the budget arithmetic is optimistic.
Fiscal deficit - It now appears certain that the government will miss the fiscal deficit target of 3.3% of GDP.
Moody’s has projected that the deficit will slip to 3.7% of GDP this fiscal year 0f 2019-2020.
Rating agencies are ultra-sensitive to fiscal deficit overruns but the positive factor here is that India’s borrowings are wholly domestic.
External debt to GDP - It is just 20% but the ratings do have an impact on investor sentiment.

When will the revival take place?

Moody’s outlook revision comes when there are faint signs of a revival in the economy.
It may be another quarter or two before growth picks up - the second-quarter numbers due in November 2019 may show GDP growing at less than 5%.
But the festive season uptick in sales of automobiles and white goods does point to the return of the consumer to the market.
Of course, the possibility that it was an artificial boost driven by the big discounts that were on offer cannot be ruled out.
There are other positive signals such as the increase in bank credit off-take reported by the RBI for the second successive fortnight.

What could be done?

The government needs to press the pedal harder on reforms and in debugging GST.
It may also have little option than to go big on disinvestment in the remaining 4 months of this fiscal.
The target of ₹1.05 lakh crore that it set for itself in the budget has to be bested by a wide margin if the fiscal deficit slippage is to be contained.
The supportive measures announced in the last 2 months should be closely monitored for implementation.

Source: The Hindu