MOODY’S MOOD TURNS NEGATIVE

For a country whose Govt is very sensitive about how foreign investors perceive India, today’s rating downgrade by Moody’s is most certainly a blow. We were so proud about our rapid rise on the Ease of Doing Business Index and then this happens.

Three years ago, exactly on this day, 8th Nov 2016, the country was plunged into chaos when demonetization (demon) was announced. And today, while we are still questioning the logic behind the demon move, Moody’s  cut India’s rating outlook from stable to negative. It maintained India’s foreign currency rating at Baa2, the second-lowest investment grade score but warned that this too could see a downgrade if fiscal deficit continues to deteriorate.

One does not know if we should give so much credence to this rating because the very same agency, in 2017, upgraded India’s sovereign ratings from the lowest investment grade to a notch higher, citing demon and GST as ‘reforms.’

This time the downgrade reason cited is the rising risk of slowdown in economic growth as prospects of reforms in the medium term have dimmed while stress in the financial sector has risen. It said in the statement, “Moody's decision to change the outlook to negative reflects increasing risks that economic growth will remain materially lower than in the past, partly reflecting lower government and policy effectiveness at addressing long-standing economic and institutional weaknesses than Moody's had previously estimated, leading to a gradual rise in the debt burden from already high levels.”

As expected, the FM has come out and vehemently denied these and said, “fundamentals of the Indian economy remain quite robust and series of reforms undertaken recently would stimulate investments.”

No one will react like this when Moody’s upgrades so when there is a downgrade, our FM has reacted exactly like how China reacted in 2017 when Moody’s announced a downgrade; in fact USA also reacted the same way when S&P downgraded it in 2011.

Realistically speaking, a downgrade may or may not cause much material harm but it does lend a body blow to the image of the country. The psychological impact is much deeper and it casts a pall of doubt over the country and its abilities.

Also remember, Moody’s is a rating agency and most of these agencies, give a rating much after the world has discounted the facts – it is always behind the curve. So the ground reality in India was known all along and Indian companies were as such coping with a slower demand. It’s a different matter altogether that the Indian markets kept on hitting new highs – the explanation is even more bizarre – markets have already discounted the slowdown and it is now betting on the future!

Irrespective of Moody’s or markets, the fact on the ground is that growth all over is down, exports are sagging, unemployment is high, private investment is nonexistent and banks are bleeding. Yes, the sentiments remain optimistic only on the surface.

It’s good that Moody’s downgraded us as India will now work harder to ensure growth picks up. Sometimes a kick on the butt is essential….