"The rating would come under additional pressure from a worsening of the debt ratio trajectory resulting from weaker medium-term growth prospects or further widening of fiscal deficits."
Fitch Ratings’ assessments will focus on India’s medium-term growth prospects and the likelihood of keeping the debt trajectory on a downward path, says Jeremy Zook, director (sovereign ratings) of the agency. He told FE’s Banikinkar Pattanayak that growth-enhancing structural reforms and addressing infrastructure gaps could boost India’s outlook if they are implemented well. Edited excerpts:
What is your forecast of India’s debt ratio for FY22, factoring in the impact of the second wave of Covid-19?
The surge in Covid-19 cases in the second wave will result in a lowering of our FY22 GDP growth forecast (previously 12.8% from our March 2021 quarterly Economic Outlook), due to the dampening of activity from mobility restrictions. We had expected the FY22 debt ratio to decline by 2.5 percentage points from 90.6% in FY21. But this will have to be reassessed as the impact of the virus surge on India’s GDP growth and public finances becomes clearer.
How will a high debt burden impact government finances and India’s sovereign rating?
We affirmed India’s ‘BBB-’ sovereign rating in April 2021, with a “negative” outlook that has been in place since June 2020. (Outlooks indicate the direction a rating is likely to move over a one-to-two-year period.) The “negative” outlook reflects uncertainty over the medium-term trajectory of the government debt-to-GDP ratio, in our view, given the considerable deterioration in this ratio over the past year. India has the highest debt ratio of Fitch-rated ‘BBB’ emerging market sovereigns at around 90% of GDP and has limited fiscal headroom from a rating perspective.
Our rating assessments will focus on India’s medium-term growth prospects and the likelihood of keeping the debt trajectory on a downward path.
The rating would come under additional pressure from a worsening of the debt ratio trajectory resulting from weaker medium-term growth prospects or further widening of fiscal deficits.
The government laid out a gradual path of fiscal consolidation in its February budget, targeting a deficit of 4.5% by FY26. This pace of consolidation seems credible to us, and the commitment to greater budget transparency is welcome. Nevertheless, there are, of course, risks to meeting these targets. In particular, the wide deficit and high public debt ratio put a greater onus on India’s medium-term GDP growth outlook for stabilizing and bringing down the debt ratio. Growth-enhancing structural reforms and addressing infrastructure gaps could boost the outlook if they are implemented well in our view.
Any chance of the debt ratio dropping to the pre-pandemic (FY20) level over the medium term?
We do not foresee India’s debt ratio declining to its pre-pandemic FY20 level of 73.9% within our 5-year debt trajectory horizon. Under our current forecasts, India’s general government debt level will reach 89% of GDP by FY25 and will be on a gradual downward trajectory thereafter.