Covid-19 blues: S&P says India’s debt level to exceed 90% of GDP in FY21

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September 26, 2020 6:15 AM

It said India's economy has been hard hit “by the confluence of the Covid-19 pandemic, the country's own cyclical slowdown, and strict domestic containment measures against the coronavirus”.

Earlier this month, S&P predicted a sharper contraction in India’s real GDP to a record 9% in FY21 than the 5% announced earlier.Earlier this month, S&P predicted a sharper contraction in India’s real GDP to a record 9% in FY21 than the 5% announced earlier.

Standard and Poor’s (S&P) on Friday forecast a spike in India’s debt levels to 90.6% of its gross domestic product (GDP) in FY21 from 73.4% a year before, although the global rating agency retained the country’s long-term sovereign rating at the lowest investment grade of ‘BBB-‘, with a stable outlook.

With this, S&P joins its peer Moody’s and some others in predicting a steeper slide in India’s fiscal metrics this year, as the Covid-19 pandemic wreaks havoc. Moody’s has also forecast that India’s debt-to-GDP ratio will worsen to 90.1% in FY21, before improving a tad to 88.5% in FY22. For its part, S&P sees India’s debt level easing only marginally to 89% of GDP next fiscal.

Earlier this month, S&P predicted a sharper contraction in India’s real GDP to a record 9% in FY21 than the 5% announced earlier. It said the continued escalation of the pandemic could keep a leash on both private spending and investment for a longer-than-expected period.

Highlighting that while the country’s external profile is improving, its fiscal position remains the “Achilles’ heel”, with general government (centre and states) fiscal deficit expected to slip to 12.5% of GDP in FY21 from 7.8% a year earlier.

“Deficit consolidation over the next three years is likely to be gradual; we forecast the change in net general government indebtedness will average 9.4% of GDP per year,” it said. However, India’s sound external metrics have strengthened on rapid reserve accumulation.

While most agencies have predicted a recovery in FY22 (S&P projects a 10% expansion next fiscal), some of them have cautioned that it will be greatly aided by a favourable base and a meaningful rebound will take time to materialise. S&P expects a permanent loss of 13% in output over the next three years.

Various established agencies have predicted a sharper contraction in India’s GDP, after the government announced a record 23.9% drop, the steepest among the G-20 economies, in the June quarter. Earlier this month, Moody’s forecast India’s GDP to shrink by 11.5% in FY21, while Fitch predicted a fall of 10.5% and Goldman Sachs 14.8%.

“The stable outlook reflects our expectation that India’s economy will recover following the resolution of the Covid-19 pandemic, and that the country’s strong external settings will act as a buffer against financial strains despite elevated government funding needs over the next 24 months,” S&P said in a statement.

The agency also affirmed its ‘A-3’ short-term foreign and local currency sovereign credit ratings on India.

It said India’s economy has been hard hit “by the confluence of the Covid-19 pandemic, the country’s own cyclical slowdown, and strict domestic containment measures against the coronavirus”. “Nevertheless, we believe the Indian economy will remain a long-term out-performer versus peers with a similar level of income.”

However, it has cautioned that it may lower the ratings if India’s economy “recovers significantly slower than we expect from fiscal 2021 onwards; or net general government deficits and the associated accumulation of indebtedness materially exceed our forecasts, signifying a weakening of India’s institutional capacity to maintain sustainable public finances”.

Last week, a finance ministry report said the government’s total liabilities rose by a steep 7.1%, or Rs 6.73 lakh crore, in the April-June period to just over Rs 101.35 lakh crore, against a 0.8% increase in the previous quarter, which reflected the enormous pressure the Covid-19 pandemic exerted on official finances.

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