India’s sovereign rating outlook being upgraded from ‘negative’ to ‘stable’ is a positive development amidst pandemic-induced gloom but the development should not lead to complacency. Several parameters — inflation, unemployment, subdued private consumption and investment and a crippling informal sector — are still in the red zone and the economic recovery path is going to be long and arduous. It must be pointed out that Moody’s has not changed India’s ratings as a bond issuer, which continues to be the lowest investment grade — Baa3. The three big rating agencies — Standard & Poor’s, Moody’s and Fitch — place India in the lowest investment grade. The pandemic has dealt a severe blow to an already ailing economy. At the end of 2021-22, the Indian economy will be only marginally stronger than its pre-pandemic level of 2019-20. The informal sector is unlikely to have recovered fully by then. Despite the stimulus packages announced by the government, both private consumption and investment are likely to remain subdued. Unless the consumption demand increases, investments will not flow in. Further, the government spending has been way below the expected levels because it is constrained by high debt. If growth disappoints in the medium term, it would worsen the debt dynamics which, as Moody’s says, could weaken the sovereign’s fiscal strength further and lead to a negative rating action. The ‘outlook’ given by any rating agency essentially refers to the chances of a country’s rating getting worse or better. A negative outlook last year meant that India’s rating was expected to worsen further. A ‘stable’ outlook now is an improvement and suggests that the government’s finances are improving.
A clutch of datasets, whether from the Periodic Labour Force Survey or from the Centre for Monitoring of the Indian Economy, shows that employment, especially the informal workforce, has been severely impacted by the pandemic. When an economy goes through a sudden and sharp contraction, as happened in the last year, it is bound to have an impact on jobs. Coupled with inflation, employment is an important social and political indicator. On its part, the Reserve Bank of India has been prioritising boosting the GDP growth while allowing prices to remain pretty high because it is still concerned about India’s growth recovery. The central bank does not want to raise interest rates or reduce liquidity available in the banking system for extending fresh loans too soon or too abruptly because such a course could hurt India’s nascent economic recovery. Volatile prices in the international crude oil markets continue to pose concerns. For a country to achieve a V-shaped recovery, a goal often cited by the government, it requires the absolute GDP of the economy to get back to the level before the crisis.
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