Moody’s bets on sustained recovery

The resurgent exports sector that has contributed to growth in the past 6-8 months must continue its strong run.

If the Indian economy has weathered the pandemic to win an outlook upgrade from Moody’s—from negative to stable—the credit must be shared by the Centre, RBI and the corporate sector. Moody’s, on Tuesday, said downside risks are receding while affirming the country’s Baa3 rating. That the ratings agency has chosen to look through the high debt-to-GDP ratio, now nudging 90%, and the ‘weak debt affordability’ suggests it is confident that growth will rebound sufficiently over the next few years to help the government to gradually bring down the fiscal deficit—6.8% in FY22.

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The debt burden is significantly higher than those of peer economies. Moody’s would have also have drawn a lot of comfort from the $638 billion worth of reserves, at a time when central banks worldwide are beginning to withdraw from their accommodative stance. The 6% equilibrium growth rate pencilled in by the agency for the medium term does seem like an under-estimate; despite the disruptions, every now and then, India does have the potential to grow faster.

Indeed, there is no denying the economy has shown resilience even if large sections—the informal sector—are still struggling and the recovery remains uneven. While the Centre didn’t infuse any meaningful direct stimulus post the pandemic, it nonetheless did initiate some measures, key among them being the ELCGS that encouraged banks to support MSMEs. RBI, of course, has done much of the heavy-lifting by ensuring there was adequate liquidity in the system; else, the government may not have been able to borrow Rs 12.8 lakh crore in FY21 and Rs 7.05 lakh crore in H1FY22. In hindsight, it appears so much liquidity may probably not have been needed, but there is no doubt it has comforted the bond market. The corporate sector, too, deserves applause for adjusting to a whole new environment, having overcome the supply-side constraints and having dealt with the disruption in labour supply so quickly and efficiently.

Fortunately for India, the hit to the financial sector has been far less severe than was anticipated, apart from the collapse of a couple of NBFCs. Delinquencies in the MSME and retail sectors have been contained; one is not clear to what extent the 6-month blanket moratorium helped borrowers, but some must have benefitted from the breather. State-owned lenders now boast strong capital adequacy thanks to the capital infusions made by the government and mop-ups from the market. Also, they are setting aside much smaller sums for loan losses than in the last three or four years, and this has boosted their profits. Moreover, since they have barely lent, except to disburse low-risk retail loans, the potential for loan losses is smaller.

What has helped the economy enormously over the past year is the tremendous performance of the IT sector and the increasing presence of e-commerce and start-ups or new-age technology-driven businesses that have been largely funded by foreign capital. These sectors together have created job opportunities at a time when the rest of the corporate sector has seen limited hiring. Pranjul Bhandari, chief economist, HSBC India, estimates e-commerce alone could add 0.25 ppt to India’s GDP growth annually over the next decade. The resurgent exports sector that has contributed to growth in the past 6-8 months must continue its strong run. Moreover, the government must ensure the PLI initiative is successful. The need of the hour is jobs that can create demand that can prompt private sector capex to make a meaningful comeback. That will push up India’s potential growth rate.