A long-overdue step

By changing its outlook on India’s sovereign rating from negative to stable for the next 24 months Standard & Poor’s has joined Moody’s and Fitch in a long-overdue move.

Till now it had held out the threat of a downgrade.  The changed outlook, soon after the robust Make in India launch by Prime Minister Narendra Modi, who has promised to make doing business in India easier, shows S&P’s has belatedly accepted that the Modi government is trying fervently to mend the economy that was caught in a legislative gridlock and policy paralysis under the earlier Manmohan Singh government.

But the elation in some quarters at the stable outlook may be premature. It might be more appropriate if rejoicing is reserved for the time when India is upgraded by S&P’s from the current BBB- rating, the lowest investment grade, in the long term. It has said it could raise the rating if the economy reverts to a real per capita GDP trend growth of 5.5 per cent per year.

S&P’s correctly diagnosed the economy’s vulnerabilities to low GDP growth since 2011 and low per capita GDP at $1,550, that yields a narrow tax and funding base and less manoeuvrability space for the government in a crisis. But it should also appreciate that Mr Modi is more than aware of this. His Make in India initiative, almost a do-or-die cry for boosting India’s manufacturing base, will put purchasing power in the hands of the poor, who can be uplifted to the middle class.