Upgrade post demonetisation, downgrade post tax cuts⁠— Moody's mood swings expose the economist’s inertia

  • Moody's upgraded India in November 2017, a year after demonetisation, but economic growth has hit a six-year low since then.
  • Those who invested based on Moody's upgrade of India would have risked huge losses.
  • The current cut in outlook for Indian economy has come after a series of measures by the government to stimulate investment and demand.
  • Was 2017 too soon to upgrade India’s credit rating or is 2019 too late to tell people that prospects are bleak?
Exactly one year after demonetisation, global credit rating agency Moody’s upgraded India with a ringing endorsement of Prime Minister Narendra Modi’s reforms. But today, three years hence, Moody’s cut the outlook on India’s economic prospects to ‘negative’.

Interestingly, the latest cut has come after weeks of continued efforts⁠— from cut in corporate taxes to merging large banks, creating a rescue fund for cash-strapped builders, and other stimulus measures⁠— by the Modi government to revive the economy from the doldrums.

However, according to many economists, the current economic slowdown in India has its roots in the ill-advised demonetisation in November 2016, when Prime Minister Modi, in one stroke, banned 86% of all cash circulating in the country.


Soon after the note ban came a well-intended but poorly executed rollout of the Goods and Services Tax (GST). Together, they threw the business, payments, and credit cycles for small businesses in the country into complete disarray. But that is when Moody’s upgraded India. The Finance Ministry then celebrated as an endorsement of the ‘Modinomics’.

However, as Sensex hit new highs in recent days, expecting a windfall for companies from the recent tax cuts and other measures intended to revive the economy, Moody’s has cut the outlook. Not surprisingly, the Finance Ministry hit back immediately.

Just like growth projections, credit ratings are important. It plays a part in an investor’s decision on whether to invest more in a country. It moves borrowing rates on foreign loans.

But as pointed out often, the GDP projections⁠— even by reputed institutions like the International Monetary Fund (IMF) ⁠— have been amiss more often than not.

In the case of Moody’s, those who invested based on the upgrade in November 2017, a year after demonetisation, must have risked huge losses as the economic growth since then slowed down sharply to a six-year low at the end of June 2019. And the slowdown has been broad-based across sectors like textiles, automobiles, aviation, consumption and many more.


While not one data point or factor determine ratings or outlook, the question remains in front of Moody's: was 2017 too soon to upgrade India’s credit rating or is 2019 too late to tell people that prospects are bleak?

Moody's says India's tax cuts, realty rescue, and bailouts are not enough to beat the slowdown

Indians were fearing recession even before data showed that GDP growth hit a six-year low