Credit Rating Agency Upgrade is Encouraging News for the Indian Economy! More Needs to be Done!

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  • The last two years have been anything but harrowing for the economic activities in the country is stating the obvious. For a country, as diverse, enormous, thickly populated, and steadily developing but nurturing aspirations to be counted amongst the best has relentlessly encountered tremendous challenges of late. The unheard-of contraction last financial year on the back of stringent pandemic restrictions has had a telling effect on the economy. Fortunately, the present scenario on this front looks more encouraging by the day as the stalled economic activities pick up the pace on the back of the vaccination drive scaling up admirably.

PC: Amit Dave

  • The prevailing sentiments all-around point to reassuring signs provided no more Covid waves makes its debilitating presence yet again. Against this backdrop, comes the welcoming news that the credit rating agency Moody’s Investors this week has enhanced the Government of India’s rating outlook from negative to stable. Further, the credit agency also affirmed Baa3 ratings for long-term loans in both domestic and foreign currency, indicative of moderate credit risk. Indications are clear that the worst of the pandemic-induced economic shock is probably behind us. Nonetheless, there is no way one can feel complacent or take the foot off the pedal at this critical junction when the pandemic is gradually on the wane.
  • Two of the underlying reasons for the change in outlook should be of particular importance to all concerned. Firstly, Moody forecasts that the real GDP in 2021-22 will surpass the pre-pandemic level. In other words, it also indicates that it will take two years to get things back on track, a period lower than what was widely estimated early on. Secondly, the important conclusion about risks of financial sector instability receding should bring cheer to the concerned authorities and players involved. Consequently, it can be deduced the danger to the real economy from financial sector fragility is less likely. Mind you, years of provisioning by banks and additional capital raising exercises have built a cushion from financial shocks.

PC: Ishan Bakshi

 

  • However, the credit agency has tempered the good news by a sobering reflection on some areas where risks remain high. As per Moody’s, the most noteworthy of them is the social risk classifying it as highly negative. This largely arises from low and uneven distribution of income and unequal access to quality education and healthcare. It specifically mentions a weakness in policy effectiveness needing a massive increase in the contribution of its manufacturing sector to GDP calling for big investments in human capital in commensurate with the rapidly advancing technology.
  • Moreover, the agency expects real GDP growth to average around 6% over the medium-term which will be inadequate to meet the need of a growing youth demographic entering the job market. Note that the high level of self-employed in India’s labour market classification is mainly a proxy of job scarcity. More needs to be forthcoming from the Government’s end by finessing its reform messaging to receive larger participation from the population. Make no mistake, the prevailing status quo cannot fulfill India’s aspirations and more should be envisaged to give further fillip to the strengthening of the economy.