Moody’s India rating upgrade: What is that the Narendra Modi government was able to do, that the Manmohan Singh government couldn’t?

Moody’s India rating upgrade from Baa3 to Baa2: In 2012, under Manmohan Singh-led UPA 2, most research reports and newspaper headlines spoke of policy paralysis plaguing the economy. Worst still, global ratings agencies had warned India of a possible downgrade to “junk” status. Come 2017, the Narendra Modi-led NDA government has managed to get a ratings upgrade for India after 13 years! The last time India got an upgrade was under the Vajpayee government. So, what’s worked?

Moody’s believes that reforms implemented to date will “advance the government’s objective of improving the business climate, enhancing productivity, stimulating foreign and domestic investment, and ultimately fostering strong and sustainable growth”. According to Moody’s, implementation of GST, MPC, steps to address NPAs, demonetisation, DBT and Aadhaar are some of the key reforms that have worked. But, what is that the Modi government did to get a Moody’s India ratings upgrade that Manmohan Singh government couldn’t?

Implementation of key structural reforms, say economists. Sachchidanand Shukla, Chief Economist, Mahindra & Mahindra is of the view that the Moody’s India ratings upgrade is a vindication of Modi government’s will to introduce structural reforms. “MPC, GST, bankruptcy code and bank recapitalisation – many things have come together to get India this upgrade. It’s also important symbolically since it comes after the China downgrade. So on a relative basis, it speaks a lot of India’s reform process,” Shukla tells FE Online. “We have managed to get this upgrade after almost 13 years – this is without a doubt a big boost. Going ahead, the two focus areas should be building upon the gains on fiscal situation and the banking sector,” he adds.

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However, Indranil Pan, Chief Economist of IDFC Bank believes that the economic and political situation of 2012 and 2017 are very different. “Back in 2012-13, India was facing multiple global headwinds. Crude oil prices were high, global financial crisis and European debt crisis were taking a toll on India’s economic growth. The focus of the government was on risk mitigation rather than pushing forward with reforms. It was further contained by the fact that it did not enjoy a majority in the Parliament,” Pan says commenting on Moody’s India ratings upgrade step. “Now in 2017, crude prices have been low for some time, implying lower inflation and also giving the government fiscal benefit in the form of excise duty. The government has a majority, at least in the lower house to push through key economic reforms. The global economic environment is less worrisome. These factors have certainly worked in favour to allow for a ratings upgrade,” he tells FE Online.

Dr Arun Singh, Lead Economist at Dun & Bradstreet India begs to differ. Comparing the situation between 2012 to 2017, DnB’s Singh credits the present government for its will to take bold steps. “Not discounting the adverse impact of global situation, the previous government did not step up pace on economic reforms. GST is just one example. Incidentally, one of the bigger problems of the economy at present, the NPA crisis of the banking sector, took seed during the previous government’s tenure. This government has shown the will to move forward on tough reforms,” he said.

Singh goes on to substantiate, “If you look back to the days of 2013 and even till early 2014, words like policy drift or policy paralysis used to fill research reports. That’s disappeared now, over the past three years several structural and fundamental reforms have been implemented.” “Steps like demonetisation and GST may have been disruptive in the short term but their long-term benefits will start showing now and over the next few years, even with soft reforms, India is set to be on high growth path,” Singh adds.

“Moody’s India ratings upgrade is just one of the factors, ease of doing business has improved, India’s has improved on various indices like the logistics index, innovation, enabling trade – there are many things that are falling into place. The only block in the path is revival of domestic private investment, once that happens, India can look forward to days of growth that will be internationally envied,” Singh says talking about the road ahead for India.