Moody’s Rating to boost Foreign Investment in India : An Analysis by Col P Chandra (Retd.)

23/11/2017 (Ten News)

Article on Moody’s Rating Upgrade
Moody’s is a global rating firm. Recently Moody’s has upgraded India’s credit worthiness from Baa3 (just above Junk Status) to Baa2 and India’s outlook is up from “Stable” to “Positive”. This upgrade means that Indian companies will now be able to borrow more cheaply from global market. It also means more investment in India. Let us understand what is Mood’s Rating and its effect on the economy of a country, especially India. It is important to bring out that other rating agencies have also upgraded India’s rating. For example Standard & Poor gave rating of BBB (Stable) in January 2017 and Fitch had given rating of BBB (Stable) in May 2017.
What is Moody’s Rating
In the year 1909 John Moody started the system of rating securities. The aim was to provide likely investors with a system of gradation to judge future creditworthiness of securities, in relative terms. It has rating symbols; each symbol represents a group in which creditworthiness are broadly the same. Following are the Global Long-Term Rating Scales:-
Aaa – Judged to be the highest quality and therefore subject to lowest level of credit risk.
Aa – Judged to be of high quality and therefore subject to very low credit risk.
A – Judged to be of upper medium grade and therefore subject to low credit risk.
Baa – Judged to be of medium grade and therefore subject to moderate credit risk. May possess certain speculative characteristics.
Ba – Judged to be speculative and therefore subject to substantial credit risk.
B – Considered to be speculative and therefore subject to high credit risk.
Caa – Judged to be speculative of poor standing and therefore subject to very high credit risk.
Ca – Judged to speculative of poor standing and therefore subject to very high credit risk.
C – These are the lowest rated and are typically in default with little prospect of recovery of principal or interest.
More Factors about Moody’s Rating
This rating assesses the ability of a country to service its debt in medium to long run perspective. It does the same for large companies also. This rating does not give too much importance to one off events like demonetization and GST. These are considered short term phenomena. Moody’s Rating focuses more on fundamentals of economy and its sustainability. On this account India looks good riding on reforms and hence up gradation in the rating.
Consider Following Facts
(i) Fiscal Deficit has fallen from 6.7% of GDP (in 2009-2010) to 3.2% this year.
(ii) Earlier RBI was happily printing currency to meet reckless government spending. Now it does not do so. It is now an independent body with its own mind and prudent decisions.
(iii) Present government monetary policy is seriously focusing on keeping inflation at around 4%.
(iv) In 2013-2014 the Current Account Deficit was as high as 4% of GDP. It has come down to 1.1% in 2015-2016 and 0.7% in 2016-2017.
(v) Foreign Exchange Reserve has grown to USD 400 Billion. This has strengthened India’s ability to withstand future economic shocks.
(vi) The reforms have been incremental and not radical. Therefore macroeconomic indicators are strong and sustainable.
(vii) Direct Benefit Transfer (DBT) has replaced subsidies. This has reduced misuse of subsidies.
(viii) More incremental steps need to be taken over next few years to strengthen the system.
Negatives yet to be overcome
(i) Lack of formal job creation.
(ii) Lack of skilled worker. Companies are unable to get suitably qualified employees.
(iii) Poor standard of educational system which creates large number of unemployable graduates who have high level of expectation despite low level of skills. Many of them are unemployable.
(iv) Proportion of women workers have not risen as expected. So the demographic dividend is not happening.
(v) All government services – Health Centers, General Administration, Schools, Colleges, Police etc continue to offer sub standard services and remain corrupt. The government has shown no will power or interest in improving these vital functions.
(vi) GST has been applied hastily which is causing lots of pain in labor intensive industry like textile. The GST regime has reduced subsidies for garment industry. So it has become uncompetitive as compared to countries like even Bangladesh. If this is not taken care of immediately millions of jobs will be lost.
(vii) The leather industry is suffering badly due to gau raksha vigilante. Millions of jobs are at risk here.
(viii) Our banking industry remains in doldrums. Bad loans off banks (NPAs) may trigger a downgrade. The recapitalization of public sector banks need urgent action.
(ix) Private sector investment has remained weak and has been hampered by high corporate debt.
(x) India needs to do lot more to improve business environment and ease of doing business
Conclusion
Moddy’s Rating has upgraded India’s rating. It has changed the mood. The rating upgrade will bring down the cost of foreign borrowing by Indian companies. India will emerge as attractive destination for investment. So Foreign investment flow will also increase due to the upgrade. But still there is a long way to go. We have to grow at the rate of at least 8% for next 20 years. Till then sustainable return to tiger economy looks doubtful.