Moody’s credit rating downgrade for India has come at the wrong time when the nation is grappling with the Covid-19 triggered economic crisis. Even though this is bad news, we should respond appropriately to it instead of dismissing it with a jingoistic response.
It is easy to rant that we should ignore this and not allow foreign rating agencies to hold us to ransom. But a better response would be to introspect, what is fundamentally wrong with our macros and initiate appropriate policy reforms.
First, let us get the issue in perspective. Rating agencies are simply doing their job. They do not have any bias towards any country. Moody’s rating downgrade puts India’s rating on par with the ratings that S&P and Fitch have for India — the lowest investment grade. The worrying aspect is that the outlook is ‘negative’, which means a further downgrade is possible. Should that happen, our rating will dip to ‘junk’ status with disastrous consequences of capital flight and currency crash, impacting macro-economic stability.
So, how should we respond?
Moody’s has categorically stated that the downgrade was caused by India’s low growth over a sustained period, absence of significant reforms since 2017, deterioration in fiscal condition of the Centre and states and the rising stress in the financial sector. It’s difficult to find fault with this assessment. Therefore, the right response should be to strengthen the weak spots.
This is a 1991 moment: Grab it
J M Keynes famously said: “Politicians will do the right thing, but only after exploring all other possibilities.”
In India, we explored all possibilities, including raising the highest income-tax rate to 97 per cent in 1973 before the 1991 balance of payment crisis forced us to reform. The rest is history.
The top priority now should be to get growth back. This can be done only through policy initiatives to raise the bar of our ‘Ease of Doing Business’ and attract investment on a massive scale.
This calls for reforms in land and labour about which Prime Minister Narendra Modi spoke in his recent address to the nation. This is the time to walk the talk. Time is of essence here.
Prepare a roadmap for fiscal consolidation
It is important to recognise the fact that India’s fisc is in bad shape. Our PSBR (public fector borrowing requirement), which includes the fiscal deficit of the Centre and states, plus the borrowings by PSUs like the FCI, is likely to be around 14 per cent of GDP in FY21. Also, our public debt-to-GDP ratio is likely to touch 80 per cent of GDP by the end of FY21. This is among the highest in emerging economies and is clearly unsustainable.
The slippage in fiscal deficit this year is global; so we need not panic. But recognising that this is unsustainable, we have to quickly prepare a roadmap for fiscal consolidation with clearly defined milestones and declare that we would return to fiscal prudence within a time frame.
We should be aware of our strengths too. Our current account is firmly under control, forex reserves at $485 billion are at an all-time high, humungous global liquidity is keeping the stock market resilient, the rupee is stable and inflation is under control. A single-party majority government with a charismatic PM provides the right setting for bold reforms.
Reform, and we will be back on track as the emerging market with the greatest potential. The time is now!