Moody’s ratings signal a blow for China and an opportunity for India

By Devanshee Dave

On Wednesday, one of the world’s top three rating agencies, Moody’s Analytics, stated that China’s economic growth has been curtailed for the first time in almost twenty-five years. In addition to this came the announcement that by 2018, the government debt will increase by 40% which will eventually reduce growth. It is evident that now is the perfect time for India to showcase its ability to compete with the world’s second largest economy but only if India can get past the roadblocks in its way.

The prevailing Chinese state

In February 2016, S&P Global also cut their Chinese growth ratings and now Moody’s is in agreement with its competitor. According to their statement, China’s budget deficit in 2016 was moderate (at 3% of GDP) but by the end of the decade, it is probably likely to touch 45%. Even contingent and indirect liabilities, such as bank loans, bonds issued by local government financing vehicles (LGFVs) and other state-owned enterprises’ (SOE) investments will increase. After this reduction in ratings, the Chinese Yuan dropped slightly from 6.8940 to 6.8890. Marie Diron, the senior vice-president for Moody’s sovereign rating group, stated that, “Moody’s expects that the economy-wide leverage will increase further over the coming years. The planned reform program is likely to slow but not prevent the rise in leverage.”

Furthermore, after scrutinising China’s ambitious One Belt One Road (OBOR) project, the UN Economic and Social Commission for Asia and the Pacific Study (UNESCAP) report determined that China is taking a risk by investing in South and Central Asia. The Chinese investment in Pakistan has also escalated to $62 billion. This is considerable given that Pakistan is a developing nation and, as per the Moody’s report, China is dealing with its low fiscal strength by having a debt burden of 66.5% of the GDP. Also, at present, China is focusing on outflows of capital which prevent the domestic market from developing by inhibiting cross-border flow of capital. Hence, China has accumulated credit ratings by questioning the assessment method and declaring it inappropriate.

Scepticism over assessment methods

In October 2016, the Finance Minister of India, Arun Jaitley, corresponded with Moody’s headquarters in order to grasp a better appreciation of the economic position that India deserves. Moody’s concern over India’s debt burden and banking sector led to ratings of Baa3 (the lowest grade for debt-considered investment). The Indian government corresponded by reducing the debt-to-GDP from 79.5 in 2004-05 to 66.7 percent in 2015-16. But in November 2016, Moody failed to reciprocate by not upgrading the credit ranking.

China is facing the same issue right now over the rankings and calculations. Last year, many Chinese government bonds were rated as being worthless but this year only 14 out of 127 are in that same rating. The situation has ameliorated but the credit rating has still been reduced, which has concerned China.

What’s in it for India?

India can take advantage of these lower ratings if it can overcome some internal inefficiencies. According to the Global Times (a national Chinese newspaper), India has immense potential to become a hub for labour-intensive industries, as the wages are five times higher in China than in India. Also, when comparing foreign direct investment (FDI), India is on top with highest FDI through capital investment at $63 billion in 2016; which is more than China and the U.S.

But the real problem for India lies in the country’s trade deficit, employment and banking system. Currently, India has a $13.2 billion higher trade deficit due to more imports than exports. India has objectified this figure by targeting to increase exports to $900 billion by 2020.

Furthermore, India’s employment has only increased by 0.1 percent from 4.9 to 5.0 in the past three years (according to the Labour Bureau). In the banking sector, the Reserve Bank of India has recently forced a new ordinance to lessen the defaulters but it will still be a long time before we see the actual impact of bad loans and NPAs.

As India has a close trade relationship with its neighbouring country, there will be drawbacks to the Chinese ratings, as cross-border trade will be affected by this. But this rating outlook will have more pros than cons for India. The country’s Make-In-India policy and the upcoming project of Asia-Africa Growth Corridor (that will fight Chinese trade) will help India to tussle with the big dragon for sure.

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