Why India should not celebrate Moody’s downgrade of China
While China’s downgrade is its first in 30 years, India is still ranked five notches below that country by Moody’s. China’s direct debt burden, Moody’s said, is at the risk of rising to 45% of GDP by the end of this decade. India’s is already at 66.67% of GDP.editorials Updated: May 29, 2017 11:55 IST
There are lessons for India in Moody’s Investor Service’s downgrade of China on account of concerns related to a slowing economy and rising debt. The downgrade lends truth to the long-standing argument of some Indian policymakers that rating agencies treat India and China differently; China should have received a downgrade long ago, they say, and India, an upgrade. India would do well not to celebrate its northern neighbour’s discomfort. While China’s downgrade is its first in 30 years, India is still ranked five notches below that country by Moody’s. China’s direct debt burden, Moody’s said, is at the risk of rising to 45% of GDP by the end of this decade. India’s is already at 66.67% of GDP. If India wants its rating to be upgraded it will need to reduce its fiscal deficit and increase trust in its macroeconomic metrics (strangely, China, with its dodgy numbers, doesn’t seem to have a problem).
To be fair, India is on track to do this. In the past decade, it has reduced its direct debt burden significantly, from 79.5% of GDP in 2004-05; a committee headed by NK Singh recently submitted a report to the government on “a debt and fiscal framework for 21st century India” that recommends bringing this number down to under 60% of GDP by 2022-23. India needs to stick to that target, and, indeed, do better. With the recent launch of new data series for factory output and wholesale inflation, the country also has far more contemporary macroeconomic indices than it did in the past, but as the controversy surrounding the new GDP series shows, it needs to do more to build trust in these numbers.
Still, if there is one area, related to debt, where India has outdone China, it is in its efforts to address the issue of bad loans at banks. In China, the official statistic for this is around 5.5% of commercial loans, although, in 2015, the International Monetary Fund estimated the real number to be closer to 15.5%. In India, over the past 18 months, the banking regulator and central bank, the Reserve Bank of India, has pushed banks to recognise the problem, and provide capital for it. Bad loans in the Indian banking system are around 13.1% of all commercial loans and at least some of them are provided for. The government has also now given the central bank backing (through an executive order) to address the problem, which is estimated to be of the magnitude of Rs 9.6 trillion.