Five Reasons Why Moody’s Should Not Make You Blue

Moody’s may have revised India’s growth forecast to 7% for current year, yet all isn’t downcast on the economic front

False Alarm

• A 7% growth rate can be considered healthy and robust especially at a time when growth engines across the world are slowing down.
• Investment cycle is expected to pick up as indirect tax collections have been high for four months in a row.
• Reform agenda is likely to be pushed with a special parliamentary session where GST and other bills will make it through.
• RBI might slash interest rates post September, which could boost growth and encourage companies to kick-start an investment cycle.

Moody’s recently cut India’s growth forecast to 7%. Coming on the heels of Fitch Ratings lowering its GDP forecast last month to 7.8%, this has triggered concern. But no need to punch the panic button, yet.

The Indian growth story remains intact and here are five reasons why the pronouncement by the global credit rating agency should be taken, if not with a pinch of salt, at least viewed in perspective:

1.   A 7% growth rate isn’t bad at all: Moody’s says it has ‘revised’ its growth prediction for the current year from 7.5% to 7% due to concerns over a ‘drier-than-average’ monsoon and the slow pace of government reforms.

The reality is that even a 7% growth rate is very healthy and robust especially at a time when growth engines across the world (including China) are slowing down. Moreover the rating agency hedges its forecast by maintaining the long-term growth prediction for India (FY16) at 7.5%, indicating that this may well be a temporary blip.

2.   Inflation is under control: The Reserve Bank’s resolve to not lower interest rates seems to be paying off with the bugbear very much in check. The global slide in crude prices is helping this further. Consumer prices rose 3.78 percent in July from a year earlier, the slowest pace since November, and below the Reserve Bank of India’s 6 percent target for January. This means that there is a stronger likelihood of the central bank slashing rates at its September policy meet, a measure which should boost growth and encourage companies to kick-start the investment cycle.

3.   Don’t write off the monsoon yet: August and September are crucial months for kharif crops. While the Indian Meteorological Department predicts a 10-12% deficit in rainfall, the amount of kharif crops sown so far at 890.82 lakh hectares is higher compared to last year.

Other economic indicators point towards the economy picking up. Indirect tax collections have risen, four months in a row. The seasonally adjusted Nikkei India Manufacturing Purchasing Managers’ Index (PMI) notched a high of 52.7 in July compared to 51.3 in June. Corporate profits though are a cause for concern. Savings as a percentage of GDP still hovers below 30%. All this may rapidly change once industry is convinced and the investment cycle picks up.

4.   Politics is the art of the possible: Moody’s says “One main risk to our forecast is that the pace of reforms slows significantly as consensus behind the need for reform weakens once the least controversial aspects of the government’s plan have been implemented.” The Narendra Modi government may have been slowed down by the uproar in the monsoon session of Parliament but they are definitely not giving up. A special parliamentary session is likely to be convened soon and given the frequent consultations with its regional allies, it will be sooner than later, that GST and other reform agenda get pushed through.

5.   Credit rating agencies are not infallible: Globally they are under flak for their inability to accurately rate real estate lending in the past, worsening the financial crisis. There is also a tendency to please issuers of securities. The signalling by credit rating agencies is only one of the factors taken into consideration by international investors and funds. Even in  the mid-2000s when India was rated at ‘junk’ by global credit rating agency Standard & Poor’s, Indian companies continued to borrow abroad and even engineered deals like the takeover of Corus by Tata Steel.