Moody’s decision on Friday to raise its rating of India’s sovereign bonds a notch, from Baa3 to Baa2, could elicit one of two reactions. On the one hand, a fair observer could feel that the decision was way overdue. And, on the other hand, an equally fair observer could raise an eyebrow at the timing. Actually, it’s possible to feel both emotions simultaneously—because, as a matter of fact, these two reactions aren’t in the least contradictory.
Various Indian governments have long argued that international credit ratings agencies discriminate against emerging markets in general and India in particular. The last Economic Survey of India, the official document released at the time of the Union government’s annual budget early in the year, devoted an entire box to this complaint. The government’s arguments were persuasive: “India has a strong growth trajectory, which coupled with its commitment to fiscal discipline exhibited over the last three years suggests that its deficit and debt ratios are likely to decline significantly over the coming years.”
Now that at least one of the big ratings agencies appears to have validated such complaints—after some unusually pushy lobbying—the government feels that it can take something of a victory lap. For Prime Minister Narendra Modi and his officials, this is the third validation from a global agency they’ve received in recent weeks. First, the World Bank raised India’s ranking in its ease of doing business index by 30 positions; then Pew Global declared that Modi himself had an enviable 90% approval rating. Now Moody’s has burnished his reformist credentials by upgrading India’s credit rating for the first time since 2004.
That said, many people are asking: Why now? Frankly, if this upgrade had come last year, fewer people would have raised questions about it. But India is at a point where it’s lost some of its growth momentum: It’s coming off six quarters of declining economic growth, though most observers expect a bit of a rebound in the coming quarter.
And the government’s hymns to the virtues of fiscal restraint are no longer quite as credible as they were a year ago. For one, while India’s goods and services tax (GST) is an important step forward—despite its poor design—its chaotic implementation means that, this financial year, observers have no very clear idea about how government finances are doing. Constant tweaks to tax rates by the GST’s steering council mean that predictions of revenues are impossible to make. And the tax’s teething pains, according to one state’s finance minister, have cost the government billions of dollars already.
The finance minister himself, rather embarrassingly for Moody’s, declared a few hours before news of the ratings upgrade hit my inbox that India’s “glide path” to a lower fiscal deficit might have to change. (Unsurprisingly, Arun Jaitley walked this back hastily during his post-upgrade “victory” press conference.) A panel appointed by the government to determine its fiscal targets has recommended aiming for a deficit of 2.5% of GDP by 2022, via a target of 3% of GDP in next year’s budget. But multiple calls on the government’s purse—including pressure to include a bit of pork in the budget in advance of general elections in 2019—mean that I, for one, wouldn’t put money on the finance ministry doing what it’s supposed to do.
And there’s always the spectre of higher crude oil prices. Modi’s government has posted decent macroeconomic numbers thanks to the precipitous fall in global oil prices since the middle of 2014; if that were to reverse, even partially, India could look much more vulnerable very quickly. Nor should we forget India’s states, which are busy competing to offer debt forgiveness to India’s distressed farmers. As one analyst quoted by Bloomberg points out, “the timing is a surprise given fiscal metrics right now.”
Altogether, while I agree that credit ratings agencies have historically been unfair to India—a country that has been remarkably responsible about external debt throughout its 70-plus years of independence—I also agree with those who argue that this upgrade, coming right now, is at best odd and at worst a dereliction of duty from Moody’s.
What are credit ratings agencies for, if not to summarize what’s actually going on with a market or an issuer for those who don’t have the time to spare on careful analysis? At a time when India’s fiscal outlook is uncertain; when its growth is stuttering; and when its politics looks like trumping good economics, a responsible agency doesn’t send out a signal that things are improving. This upgrade is good news for India and its reputation; less so for Moody’s.