GST will promote productivity, says Moody's after upgrading India's credit rating

Credit rating agency Moody's has upgraded India’s sovereign ratings to Baa2 from its lowest investment grade (Baa3) for the first time since 2004 even as it had downgraded China's credit ratings for the first time in nearly 30 years recently.

Moody’s said the goods and services tax(GST) will "promote productivity by removing barriers to interstate trade, improvements to the monetary policy framework, measures to clean up non-performing loans, and efforts to bring more areas into the formal economy."

However, the credit ratings agency added that GST and demonetization had undermined growth in the near term.

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“The decision to upgrade the ratings is underpinned by Moody’s expectation that continued progress on economic and institutional reforms will, over time, enhance India’s high growth potential and its large and stable financing base for government debt, and will likely contribute to a gradual decline in the general government debt burden over the medium term," the credit rating agency said.

Moody’s has forecast GDP growth of 6.7 per cent for the fiscal year ended March 2018, with 7.5 per cent in 2019 and "similarly robust" levels from 2019 onward.

“However, as disruption fades, assisted by recent government measures to support SMEs and exporters with GST compliance, real GDP growth will rise to 7.5% in FY2018 (2018-19), with similarly robust levels of growth from FY2019 (2019-20) onward. Longer term, India’s growth potential is significantly higher than most other Baa-rated sovereigns,” it said.

The credit agency also raised India’s long-term foreign-currency bond ceiling to Baa1 from Baa2, and the long-term foreign-currency bank deposit ceiling to Baa2 from Baa3.

The short-term foreign-currency bond ceiling remains unchanged at P-2, and the short-term foreign-currency bank deposit ceiling has been raised to P-2 from P-3. The long-term local currency deposit and bond ceilings remain unchanged at A1.

The agency has also upgraded India’s local currency senior unsecured rating to Baa2 from Baa3 and its short-term local currency rating to P-2 from P-3.