‘Rating upgrade for India unlikely in the short term’

Suresh P Iyengar Mumbai | Updated on January 12, 2018 Published on June 12, 2017


The cloud of uncertainty over economic growth has not deterred the stock market from scaling new heights. While the roll-out of GST from July has been hailed as the single largest tax reform, it is likely to slow down the economic recovery and stoke up inflation in the short term. Ridham Desai, Managing Director, Morgan Stanley India, believes that the country is on the right path to growth. Excerpts:

How do you see India’s economic growth prospects?

I see strong growth in exports, consumption and government investments to drive growth in the short term. People generally worry about tepid private investment, slowdown in credit growth and job creation, but these are lagging indicators. All these lagging indicators will turn positive in 12-18 months once economic growth sustains.

Exports growth has been going up on a smaller base ...

That’s how it recovers. Global trade collapsed between 2015 and 2016. There has been a recovery across the board. I do not think there is going to be an immediate impact from the Gulf crisis but Europe and US are much stronger. Japan economy has recovered.

The world is surprised by the upside on all these economies. There is a boom in the stock markets of these countries. Stock markets are not dumb they know what is happening in their country.

Will foreign fund flow into India continue amid recovering global economy?

I am sure it will continue. India is a very small market to get impacted. The big story in India is about domestic developments and is not worried about happenings abroad. Again, fund flows are lagging indicators and they do not lead the market.

Rising stock prices lead the flow. FDI will become very small in the context of domestic flow. I think the Narendra Modi government has completely changed India’s FDI stance. India has become number one destination in the world for FDI. These are the structural alterations to the Indian economy.

How do you see GST roll-out impacting the economy?

I think the GST will have short-term disruption. Whether the market pays attention to it depends on what happens in the global equity market. If there is a correction in the global market, then India will follow. Initially, GST roll-out is going to be an execution nightmare with 100 million transactions to be digitised.

What will small businesses achieve by adopting GST?

The government has created a large infrastructure in Bengaluru to digitise millions of transactions. In the next two-three years, it will help small businesses raise money at cheaper rates. Banks would be able to get data about a particular small corporate directly from the GST network and access authentic data on their fund flow.

With the risk profile of the business and revenue estimates of the corporate, banks will have better understanding of the company and can lend at a cheaper rate if they are convinced of future growth. (In the) GST (regime), lending will be based on future earnings, compared to that based on fixed assets now.

How do you see the government’s moves to solve the NPA problem?

The whole issue around non-performing assets got complicated as banks were late in recognising bad loans.

As the growth cycle turns, some loans which had become non-performing assets due to cyclical reason will turn around. Some of them can become standard assets if banks give them enough time.

As you are so bullish on economic growth, is a rating upgrade for India in the offing?

It is unlikely, because the debt to GDP is high.

The debt level has to come down substantially and economic growth needs to be faster for a rating upgrade. Even after a rating upgrade,

it is unlikely that India is going to see a huge fund flow into the debt market as there are restrictions on foreign fund flow.

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Published on June 12, 2017
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