Since the present union government took over in may 2014, there has been
a consistent effort to improve the quality and quantity of Indian economy.
The vision of JAM trinity has led to decrease in the leakage of the
subsidies and unnecessary wastage of the public finances. Jan dhanyojana has
led to the opening of more than 25 crore bank accounts in the country and
the poor is now mostly integrated in the economy of the country. Similarly
through Mudra yojana loans have been disbursed to the needy section of the
society. NDA Government’s push to infrastructure has been evident. Be it
Railways, Roads, or Shipping the Government is focusing on augmenting the
infrastructure to aid in connectivity. For the first time, Railways budget
focused on structural reforms and infrastructure changes. Probably the most
important reform of all is single indirect tax in the form of Goods and
services tax in the country. Single indirect tax will lead to improvement
business activity in the country, it will make the doing of business
completely hassle free.
All this has led to the improvement of economic health of the country.
India is the fastest growing large economy in the World. India has also seen
a large jump of 30 places in the World Bank’s Ease of doing business index.
This will also make India more attractive as an investment designation. Ease
of doing business index has improved due to various factors but important
among them is Govt has repealed Close to 1800 obsolete legislations,
transparency in the auctioning and functioning of government.
Key elements of the reform program include the recently-introduced Goods
and Services Tax (GST) which will, among other things, promote productivity
by removing barriers to interstate trade; improvements to the monetary
policy framework; measures to address the overhang of non-performing loans (NPLs)
in the banking system; and measures such as demonetization, the Aadhaar
system of biometric accounts and targeted delivery of benefits through the
Direct Benefit Transfer (DBT) system intended to reduce informality in the
economy. Other important measures which have yet to reach fruition include
planned land and labor market reforms, which rely to a great extent on
cooperation with and between the States.
Most of these measures will take time for their impact to be seen, and
some, such as the GST and demonetization, have undermined growth over the
near term. Moody's expects real GDP growth to moderate to 6.7% in the fiscal
year ending in March 2018 (FY2017). However, as disruption fades, assisted
by recent government measures to support SMEs and exporters with GST
compliance, real GDP growth will rise to 7.5% in FY2018, with similarly
robust levels of growth from FY2019 onward. Longer term, India's growth
potential is significantly higher than most other Baa-rated sovereigns.
After taking into consideration the above mentioned reform initiatives
Moody's Investors Service ("Moody's") has upgraded the Government of India's
local and foreign currency issuer ratings to Baa2 from Baa3 and changed the
outlook on the rating to stable from positive. Moody's has also upgraded
India's local currency senior unsecured rating to Baa2 from Baa3 and its
short-term local currency rating to P-2 from P-3.The decision to upgrade the
ratings is underpinned by Moody's expectation that continued progress on
economic and institutional reforms will, over time, enhance India's high
growth potential and its large and stable financing base for government
debt, and will likely contribute to a gradual decline in the general
government debt burden over the medium term. In the meantime, while India's
high debt burden remains a constraint on the country's credit profile,
Moody's believes that the reforms put in place have reduced the risk of a
sharp increase in debt, even in potential downside scenarios.
Moody's has also raised India's long-term foreign-currency bond ceiling
to Baa1 from Baa2, and the long-term foreign-currency bank deposit ceiling
to Baa2 from Baa3. The short-term foreign-currency bond ceiling remains
unchanged at P-2, and the short-term foreign-currency bank deposit ceiling
has been raised to P-2 from P-3. The long-term local currency deposit and
bond ceilings remain unchanged at A1.
The government is mid-way through a wide-ranging program of economic and
institutional reforms. While a number of important reforms remain at the
design phase, Moody's believes that those 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. The reform program will thus
complement the existing shock-absorbance capacity provided by India's strong
growth potential and improving global competitiveness.
Government efforts to reduce corruption, formalize economic activity and
improve tax collection and administration, including through demonetization
and GST, both illustrate and should contribute to the further strengthening
of India's institutions. On the fiscal front, efforts to improve
transparency and accountability, including through adoption of a new Fiscal
Responsibility and Budget Management (FRBM) Act, are expected to enhance
India's fiscal policy framework and strengthen policy credibility.
Much remains to be done. Challenges with implementation of the GST,
ongoing weakness of private sector investment, slow progress with resolution
of banking sector asset quality issues, and lack of progress with land and
labor reforms at the national level highlight still material government
effectiveness issues. However, Moody's expects that over time at least some
of these issues will be addressed, resulting in a steady further improvement
in India's government effectiveness and overall institutional framework.
Recent announcements of a comprehensive recapitalization of Public
Sector Banks (PSBs) and signs of proactive steps towards a resolution of
high NPLs through use of the Bankruptcy and Insolvency Act 2016 are
beginning to address a key weakness in India's sovereign credit profile.
While the capital injection will modestly increase the government's debt
burden in the near term (by about 0.8% of GDP over two years), it should
enable banks to move forward with the resolution of NPLs through
comprehensive write-downs of impaired loans and increase lending gradually.
Over the medium term, if met by rising demand for investment and loans, the
measures will help foster more robust growth, in turn supporting fiscal
The rating could face upward pressure if there were to be a material
strengthening in fiscal metrics, combined with a strong and durable recovery
of the investment cycle, probably supported by significant economic and
institutional reforms. In particular, greater expectation of a sizeable and
sustained reduction in the general government debt burden, through increased
government revenues combined with a reduction in expenditures, would put
positive pressure on the rating. Implementation of key pending reforms,
including land and labor reforms, could put additional upward pressure on