InvestorQ : Is Moody’s justified in downgrading the Indian economic outlook? Government officials have called the downgrade flawed. That is why I ask?
Priyanka N made post

Is Moody’s justified in downgrading the Indian economic outlook? Government officials have called the downgrade flawed. That is why I ask?

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NISHA Nayak answered.
2 years ago
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While Moody’s does follow a very time-tested model for rating companies and economies, there are perhaps 2 important points which you must understand and which does raise some doubts over the rating shift.

The first is the fiscal deficit question. One of the major concerns that Moody’s has raised is that the fiscal deficit could spillover by a major margin. The fiscal deficit has already breached the 3.3% mark and Moody’s expressed major apprehensions that the actual fiscal deficit could be higher than 3.7% for the full year. What Moody’s needs to remember is that for a country like India growth will always come at a price and that price will be in the form of a higher fiscal deficit. That is what a counter cyclical approach to growth is all about. Pump priming is all about tolerating a higher fiscal deficit as long as it results in higher growth. Measures like the corporate tax cuts, bailout of banks and higher infrastructure spend can all add to the fiscal deficit but it is the need of the hour. There is just too much ado over fiscal deficit control.

Secondly, Moody’s appears to have ignored some important reforms undertaken by the Finance Minister in the last 50 days. A number of measures taken by the government are long term positive. The tax cuts will add nearly Rs.145,000 crore to the bottom-line of banks. In terms of market value, this could make a big difference. Secondly, the real estate bailout fund of Rs.25,000 crore is also likely to be a major positive in terms of ensuring adequate liquidity flows into the system. Above all, the government is giving back billions to boost inflation. Most of these aspects appear to be ignored by the outlook downgrade. This probably refers to an earlier period but it does look incomplete in the absence of these considerations.

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