Is it a pat on the back or a warning? Depends.

About 3 weeks back India jumped 30 places in the World Bank rankings in 'Ease of Doing Business'. Then a few days back Moody's upgraded India's credit rating by one notch to Baa2. Demonetization, GST, low inflation and increased foreign reserves are expected to increase growth and make the economy stronger in the longer term. Although government debt will increase by 0.8% of GDP in the next two years due to injection of capital into public sector banks to deal with bad loans, it will help the economy by helping banks to increase lending for new projects. The new rating implies investment grade with moderate risk, much better than the speculative grade with substantial credit risk that we enjoyed till 2004, but much lower than A2 that we had in 1988. Why is it important? Because it will reduce borrowing costs for our companies and encourage foreign funds to invest in our stock market. Naturally, business leaders are cheering the government of Prime Minister Narendra Modi. Some are urging caution. Only Moody's increased our rating and not Fitch and S&P, our debt to GDP ratio is about 70%, much higher than China's 46%, fiscal deficit could increase because of recapitalization of banks, current account deficit will increase because of high oil prices, and more loans will turn sick in our banks. Moody's believes that reforms will reduce corruption and banks will become stronger with extra capital. Markets are rejoicing because increased foreign investment and a stronger rupee will increase profits of punters. Ten charts show why this upgrade became necessary. At 8-10% our GDP growth will be the strongest in Asia, inflation will remain stable, investment will strengthen, exports will increase as the global economy grows, and the rupee is strong. There are some contradictions. If the rupee becomes stronger exports will become more expensive, or the rupee may collapse if foreign investors flee for external factors, say, if war breaks out in the Middle East or if a North Korean missile hits a Japanese town or a US ship by accident. A weaker rupee will immediately increase cost of imports and result in a spike in inflation. Our garment industry, which exports worth $17 billion and creates jobs, is suffering because of GST. Doing business remains as challenging as ever because corruption is rampant at lower levels, even if it has largely disappeared from upper levels of government. After indicating that fiscal deficit discipline may slip the Finance Minister was forced into a smart about turn, saying, "We'll continue to maintain the glide path." This rating upgrade could be a challenge because the government cannot afford to slip up in any way. So, a deserved reward or golden handcuffs? We shall see.