Outlook Upgrade – Did Moody’s get carried away by the euphoria?

Actually, I was surprised when Moody’s upgraded India’s outlook on Thursday. Moody’s justification for the outlook upgrade was slightly weird. The reasons offered by Fitch (another rating agency) for not upgrading India’s outlook, is a lot more incisive.

Ease of doing business…

There are many ways to approach this indicator. One way could be to look at the World Bank ranking of the ease of business indicators. India has consistently been ranked at the lowest level within the BBB- category. Another way of looking at it would be the quality of infrastructure. India is still to achieve the quality of infrastructure that Asian nations like Thailand, Malaysia and Korea achieved 3 decades ago. I am not even talking about Singapore, Hong Kong and Japan. What India needs to remember is that poor infrastructure imposes an indirect cost of 1.8% to 2% on the GDP each year. While there has been a lot of hype over infrastructure over the last 20 years, not much has translated into ground-level action.

India is too much in debt…

Fitch has rightly brought out that the government debt is almost at an unsustainable level in India. Sample this! The proportion of government debt to GDP is over 65%. This is again the highest among the BBB- nations. Fiscal deficit has hardly been addressed by the current government. While the government has surely managed to reach its 4.1% fiscal deficit target for the fiscal just concluded, it has become lax in future outlook. For example, the fiscal deficit targets have been raised for the next 3 years and existing targets compromised. India has another unique problem. It almost funds its entire fiscal deficit through hot portfolio inflows. The situation has been partly redeemed by low oil prices. But, if oil prices start rising again then it could seriously jeopardize the Indian currency as well as fiscal deficit targets.

GDP per capita is pathetic…

India’s population of 1.2 billion surely works against it. For every 1 trillion addition to GDP, you add less than $1000 to the per capita income. The gap becomes all the more glaring if you look at the ranking of countries by nominal GDP per capita. India ranks around 142nd by the IMF rankings. Other rankings are not very much off this mark. Let us for a moment forget about North America, Western Europe, South-East Asia and Oceania. India’s per capita GDP is substantially lower than countries in Latin America, West Indies, North Africa, Eastern Europe and even the former Soviet satellite states. Being in the same league as Suriname, Pakistan and Lesotho is hardly flattering. Fitch’s logic looks more rational. Moody’s seems to have been carried away by the euphoria of the moment! ©

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