Moody's explains in 4 points why it upgraded India's credit ratings after 13 years

Moody's on Friday upgraded the government's local and foreign currency issuer ratings to Baa2 from Baa3 and changed the outlook on the rating to stable from positive after a gap of 13 years. The decision to upgrade the ratings is underpinned by agency's expectation that continued progress on economic and institutional reforms will enhance India's high growth potential and will contribute to a decline in the government debt. Here are four main points based on which Moody's upgraded India's credit ratings .

REFORMS IMPROVING BUSINESS CLIMATE

The agency said the reforms initiated by the Indian government could improve the business climate, productivity, stimulating foreign and domestic investment, and hence fostering strong and sustainable growth. The report talks India's economic moves, including GST, demonetisation, Aadhaar and the Direct Benefit Transfer, and said these initiatives would reduce informality in the economy. "Most of these measures will take time for their impact to be seen, and some, such as the GST and demonetisation, have undermined growth over the near term. Moody's expects real GDP growth to moderate to 6.7% in the fiscal year ending in March 2018 (FY2017)," the agency said.

STABLE PUBLIC INDEBTEDNESS

Moody's report says the recent reforms offer greater confidence that the high level of public indebtedness, which is India's principal credit weakness, will remain stable even in the event of shocks, and will ultimately decline. The report said:  "Measures (GST, DBT and Demonetisation)will increase the degree of formality in the economy, broaden the tax base, and promote expenditure efficiency through rationalisation of government schemes and better-targeted delivery will support the expected, though very gradual, improvement in India's fiscal metrics over time."

STRUCTURAL REFORMS STRENGTHENING INSTITUTIONS

The report says the government efforts to reduce corruption, formalise economic activity and improve tax collection and administration, should contribute to the further strengthening of India's institutions. "On the fiscal front, efforts to improve transparency and accountability, including through adoption of a new Fiscal Responsibility and Budget Management (FRBM) Act, are expected to enhance India's fiscal policy framework and strengthen policy credibility," the agency said. It also said that the formation of a Monetary Policy Committee (MPC) has already enhanced the transparency and efficiency in India.

GOVT SUPPORT TO BANKS REDUCING RISK

Moody's said that the recent announcements of a comprehensive recapitalisation of Public Sector Banks (PSBs) and signs of proactive steps towards a resolution of high NPLs through use of the Bankruptcy and Insolvency Act 2016 are beginning to address a key weakness in India's sovereign credit profile. "While the capital injection will modestly increase the government's debt burden in the near term (by about 0.8% of GDP over two years), it should enable banks to move forward with the resolution of NPLs through comprehensive write-downs of impaired loans and increase lending gradually," it said.

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