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Upgrade of India’s rating outlook by Moody’s shows positive ground level changes have happened : K Subramanian


When one adds the impact on investment and efficiency gains that come from all these reforms that have been done, the potential growth should be north of 6.5%. Yet, for Moody’s to estimate it at 6% is something that I am confident will get revised, says K Subramanian, Chief Economic Adviser. Govt of India.


Does the rating outlook upgrade by Moody’s make you happy or would you ask for an upgrade for India you have been pitching it for a very long time?
It certainly is a positive development. The fact that they have recognised the risks from the financial sector and its impact on the real economy that has declined, is something very heartening because it is a recognition of the positive ground level changes that have happened.

At the same time, our efforts have been to make them see several of the positives that we are ourselves seeing. For instance, just to pick up a particular aspect in their outlook, they have mentioned that 6% is the real growth that they are anticipating in the medium term, which is about five to six years. If you leave out the last two years before the pandemic, which was impacted by the financial sector, the potential growth for India was about 6.5%. That was without any of the reforms that have been done now.

So, when you add the impact on investment and efficiency gains that come from all these reforms that have been done, the potential growth should be north of 6.5%. Yet, for them to estimate it at 6% is something that I am confident will get revised. We have been generally early in calling out these positives. They have come around from their conservative stance to actually see our points of view. This is an illustration of the same thing.

It reaffirms India’s stance. Are you taking this issue up with the other rating agencies as well? Over the last few months, we have undertaken a lot of reforms and we will see demand pick up. Is this something that you are taking up with the other rating agencies?
Absolutely, but let me clarify that it is part of our ongoing engagement with all the rating agencies and the other international agencies as well, where we have been highlighting some of the important differences. To give you a specific example, a lot of them talk about scarring from the pandemic. It is important to distinguish the institutional differences between a country like India versus advanced economies.

In advanced economies, almost the entire economy is formalised and therefore any short term impact through the financial sector through balance sheet effects can create scarring. In the Indian context, one has to separate it into the organised sector and the unorganised sector. The organised sector relies on labour and capital and is very similar to the advanced economies. So there they could have been scarring but in the unorganised sector, production is dependent a lot more on labour and so as soon as the negative shock goes away, they come back almost in a V-shaped recovery. This distinction is something that has not been seen much in the assessments by the international agencies. These are the important points that have to be actually taken into account understand the intricacies of a phenomenon like scarring, the nature of production and then apply it to a country like India.

One of the things that Moody’s has said is that the fiscal strength of India is still very weak as compared to peers and for an upgrade, India’s debt to GDP will have to come down from the current 89% levels. In the past, the NK Singh panel had recommended a 65% debt to GDP, 3% fiscal deficit target. Do you see a need to revise the targets to align it more with the needs of India?
Absolutely. It is important for all international agencies, not just the rating agencies, to see the very strong economic arguments backed by data that the Ministry of Finance puts out has been doing over the last entire two and a half, three years.

Take the fiscal situation; while India entered the pandemic in a worse situation compared to the peers, . If you look at the fiscal deficit, India at 9.2% fiscal deficit last year (I am only focusing on central government numbers because the state numbers are not there), compared to 10.5% for our peer economies has done way better.

Also, as we had highlighted in the economic survey, it is the difference between nominal growth and the nominal rate of interest that basically affects the debt to GDP ratio, even if one goes by Moody’s assessment of 10% nominal growth which I think is an underestimate. The interest rate growth rate differential will be far more supportive for India than any of the other peer economies because we will grow at much higher rates than peer economies.

These are conceptually involved aspects that need to be taken into account to update priors and come up with assessments and that is an effort that we have been trying all through. Some of it is fructifying.

You are saying that the 6% estimate is an underestimation of sorts. The economic survey had said that we will close the year at close to 11% growth levels. Are you still going to stick with those projections?
I had mentioned that the Budget estimate has taken it at 10.5%. Given that the first quarter numbers have come and the way the high frequency indicators are moving in the second quarter, there is a very high likelihood that we will end the year with double digit growth. And here again, Moody’s has actually estimated at 9.3%. I am quite confident that we will actually exceed that and very likely we will end with double digit growth.



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