Moody’s downgrade ignores a lot of recent reformist measures

Rating agency, Moody’s, downgraded the outlook for the Indian economy from stable to negative. It needs to be recollected that back in 2017, Moody’s was the only global rating agency to upgrade India’s rating. At that time, S&P and Fitch had refused to upgrade the ratings due to concerns over the fiscal deficit and the overall debt levels. Now, the agency has maintained the ratings at Baa2 but has downgraded the outlook to negative. What does this mean for the Indian economy?

More of a warning

Moody’s has raised genuine concerns on the macroeconomic front. For example, the weak rural demand and the stress on auto numbers is a reality. It is also true that consumption has taken a hit due to the combination of economic uncertainty and tightness in the credit markets. But the downgrade should be seen in the light of the fact that Moody’s was the only agency to upgrade India ratings in 2017. At that point of time, the upgrade was based on certain assumptions that the demand scenario would pick up in the next 2 years. In the last two years, the overall GDP growth has also fallen to as low as 5% and now the likes of Nomura have downsized the full year growth to 4.9%. In that light, the assumptions of Moody’s have come under question. This outlook downgrade should be seen more as a warning to the government to put the growth house in order and give a boost.

Fiscal deficit question

One of the major concerns that Moody’s has raised is that the fiscal deficit could spillover by a major margin. The fiscal deficit has already breached the 3.3% mark and Moody’s expressed major apprehensions that the actual fiscal deficit could be higher than 3.7% for the full year. What Moody’s needs to understand is that for a country like India growth will always come at a price and that price will be in the form of a higher fiscal deficit. That is what a counter cyclical approach to growth is all about. Pump priming is all about tolerating a higher fiscal deficit as long as it results in higher growth. Measures like the corporate tax cuts, bailout of banks and higher infrastructure spend can all add to the fiscal deficit but it is the need of the hour. There is just too much ado over fiscal deficit control.

Reforms are ignored

A number of measures taken by the government are long term positive. The tax cuts will add nearly Rs.145,000 crore to the bottom-line of banks. In terms of market value, this could make a big difference. Secondly, the real estate bailout fund of Rs.25,000 crore is also likely to be a major positive in terms of ensuring adequate liquidity flows into the system. Above all, the government is giving back billions to boost inflation. Most of these aspects appear to be ignored by the outlook downgrade!