Institutional Reforms Validated, Reform Input Markets For Next Upgrade
$111 billion in short-term debt maturing by June 2018, can now potentially be refinanced at cheaper rates.
Friday’s upgrade of India’s sovereign rating from Baa3 to Baa2 was relatively unexpected, yet welcome, well-deserved and long overdue. The government has worked overtime to reverse, stabilise and then improve many of India’s structural weaknesses and even though the concrete benefits might be some time away, a big enough critical mass of actual and latent reform and intent has built up over the past three years for Moody’s Investors Service to give the Government of India a shout out on its efforts.
This action was also a clear nod to the proposition that a country’s growth would inevitably slow in the aftermath of the deep structural changes undertaken by the government:
- Financial Sector Legislative Reforms Commission (FLSRC) recommendations to overhaul India’s creaking financial oversight architecture,
- Inflation targeting monetary policy via a Committee,
- The Insolvency and Bankruptcy Code,
- Benami Act,
- Real Estate Regulation Act,
- Ease of Doing Business measures.
A comparison of India’s macro fundamentals and growth potential versus most of our emerging market peers substantiates the rationale for a ratings upgrade.
Almost immediately after the National Democratic Alliance government assumed office in mid-2014, it got a bonus with a sharp fall in oil and commodity prices which opened up significant fiscal space for higher spends and improved India’s external balance of payments in one shot.
To its full credit, the government progressively leveraged this windfall to ensure sustainability of the improvement, when it could easily have undertaken expedient populist measures.
One example of this, which has attracted much criticism was imposing higher excise taxes on petrol and diesel, which enabled it to build up revenue buffers to counter an economic slowdown, and simultaneously keeping lower incentives to consume more fuel, which would have negated part of the improvement in India’s fuel import bill.
But longer term benefits will gradually become evident. India’s equity markets valuations are already strong, reflecting the premium global investors have on India. The impact will be more on debt. India’s external debt is now $486 billion, of which $111 billion is short-term debt by residual maturity, i.e., which will mature by June 2018, which can potentially be refinanced at cheaper rates. There’s another $80 billion of trade credit outstanding. India’s share of global portfolios is likely to increase, which will facilitate access to cheaper capital. There is one caveat. India’s Credit Default Swap (CDS) spreads are already priced just a little above China’s (rated A1) and significantly below, say, Mexico’s (A3). However, markets will probably gradually start pricing in the next upgrade in India’s ratings.
And what next?
We should be a country in a hurry to raise our potential growth and our absorption capacity for the foreign capital flows we so dearly need for the massive infrastructure needs.
The fiscal federalism push of the current government has to be taken forward, with states’ accountability to its stakeholders increased. A renewed focus on input markets – land, labour, connectivity – will be the next major step forward. In this, a strong signal of global investor approval will be a powerful stimulus.
Saugata Bhattacharya is Senior Vice President – Business and Economic Research at Axis Bank. Views are personal.
The views expressed here are those of the author’s and do not necessarily represent the views of BloombergQuint or its editorial team.