Union Finance Ministry’s Chief Economic Adviser Krishnamurthy Subramaniam on Tuesday said international rating agency Moody’s estimate of India’s growth rate of 6 per cent is “underestimated” as the country has been “fiscally too prudent”. He suggested that the US-based firm should take India’s reforms into account while forecasting the growth rate.
On the same in an exclusive interview to CNBC-TV18, Subramaniam said, “We have always maintained that the fundamentals of the economy are strong. We asked Moody’s to take a look. Banking and fiscal position is looking better. We spoke about the economic situation in India and assured Moody’s that this year’s budget has given a clarion call for reforms. Accepted concerns about future NPAs from retail and MSMEs.”
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“Moody’s estimate of 6 per cent growth rate has been underestimated. India’s potential growth rate is 7.5 percent. Moody’s has to take India’s reforms into account while assessing the growth rate. India has been very prudent financially,” he said.
Subramaniam also said that the time has come for international agencies to take into account the necessary conditions for announcing the reforms. “Private capex rates are clearly rising. Private capital investment is increasing in both services and manufacturing. India is the only country that focused on supply side measures. Despite rising commodity prices, India’s inflation is under control. The supply side reforms will certainly boost private capital expenditure.”
The reaction came after Moody’s downgraded India’s rating outlook from ‘negative’ to ‘stable’, saying Asia’s third-largest economy is recovering and growth this fiscal will surpass pre-pandemic rates.
Moody’s Investors Service, however, placed India’s sovereign rating at ‘Baa3’ – the lowest investment grade, just a notch above junk status. The change in rating outlook from ‘negative’ to ‘stable’, which was assigned in November 2019, reflects diminishing downside risks to the economy and financial system. “An economic recovery is underway and activity is increasing and broadening across sectors,” Moody’s said.
After a deep contraction of 7.3 per cent in FY20 (ending March 2021), Moody’s expects India’s real GDP to surpass 2019 levels this fiscal (April 2021 to March 2022), a growth rate of 9.3 per cent. with, followed by 7.9 per cent in the next financial year. “The downside risks to growth from subsequent coronavirus infection waves are mitigated by increased vaccination rates and more selective use of restrictions on economic activity, as seen during the second wave,” it noted.
The US-based rating firm had downgraded India’s rating in 2020 from ‘Baa2’ to ‘negative’ outlook, saying there would be challenges in policy implementation amid low growth and deteriorating fiscal situation. “The decision to change the outlook to stable reflects Moody’s’ view that downside risks are being mitigated by negative feedback between the real economy and the financial system,” Moody’s said in a statement on Tuesday.
Looking ahead, Moody’s expects real GDP growth to average around 6 percent over the medium term, indicating a rebound in activity once the situation normalises. The government announced reforms throughout the pandemic including measures aimed at increasing the flexibility of labor laws, enhancing farm efficiency, expanding investment in infrastructure, encouraging manufacturing sector investment and strengthening the financial sector . “If implemented effectively, these policy actions will be credit positive and could lead to higher-than-expected potential growth,” Moody’s said.
However, it noted that India’s general government debt burden increased from 74 per cent of GDP in 2019 to an estimated 89 per cent of GDP in 2020, significantly higher than the ‘ba’ mean of about 48 per cent. “Looking ahead, Moody’s expects the debt burden to stabilize at around 91 percent over the medium term, as strong nominal GDP growth is balanced by a slowly shrinking, but still large, primary deficit. “Combined, a higher debt burden and weaker debt capacity before the pandemic, which Moody’s expects to continue, contribute to lower fiscal strength,” it said.
(with inputs from PTI)
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