Thumbs down: On Moody’s negative rating (The Hindu)

Mains Paper 3: Economy
Prelims level : Moody’s rating
Mains level: Moody’s rating on growth prediction

Context

• Ratings agency Moody’s has reacted predictably to the turbulence in the economy by revising the outlook on its sovereign rating for India from stable to negative.
• Moody’s India rating is a notch higher than that of Standard & Poor’s.
• The outlook revision now may well be to compensate for its past optimism on India.

What’s the rating indicate?

• It is 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.
• The growth slowdown and its effects on the fiscal deficit and borrowings are the main worries.
• On the one hand, tax revenue growth is nowhere near budgeted levels and with the slowdown extending into the third quarter, it is clear that tax revenues will undershoot by a wide margin.
• On the other, the government has been forced to spend more to give a leg up to the economy.
• Apart from pushing expenditure on capital projects, the government last month gave away corporate tax concessions amounting to a whopping ₹1.45 lakh crore.

Growth prediction

• The boost from the ₹1.76 lakh crore dividend payout from the Reserve Bank of India, the budget arithmetic is optimistic and 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.
• Ratings agencies are ultra-sensitive to fiscal deficit overruns but the positive factor here is that India’s borrowings are almost wholly domestic.
• External debt to GDP is just 20% but the ratings do have an impact on investor sentiment.

Moody’s outlook revision

• It may be another quarter or two before growth picks up the second quarter numbers due later this month 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.
• The possibility that it was an artificial boost driven by the big discounts that were on offer cannot be ruled out.
• But there are other positive signals such as the increase in bank credit offtake reported by the RBI for the second successive fortnight.

Way forward

• 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 four 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 two months should be closely monitored for implementation.

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Prelims Questions:

Q.1) With reference to the Coal India Limited (CIL), consider the following statements:
1. It is a state-owned coal mining company which contributes to over 80% of the coal production in India.
2. It was conferred the Maharatna status by the Union Government of India.

Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer: C
Mains Questions:
Q.1) Moody’s has flagged known risks, and the Centre has to push harder for reforms. Comment.