Testing times: India has ‘gold standard’ in debt servicing, says CEA Krishnamurthy V Subramanian

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Published: June 12, 2020 3:00 AM

Even when the country faced its worst balance of payment crisis in 1991, it honoured its debt commitment by mortgaging gold, CEA said.

The CEA refrained from offering a precise growth forecast for the current fiscal due to the existence of several variables.

Days after rating agencies predicted a sharp spike in India’s debt levels to 80-84% of GDP, chief economic advisor (CEA) Krishnamurthy V Subramanian on Thursday asserted that the country’s record in both willingness and ability to pay off debt is nothing short of “gold standard”.

Even when the country faced its worst balance of payment crisis in 1991, it honoured its debt commitment by mortgaging gold, he said. Most of India’s debt is in the domestic currency, and not foreign currency, he highlighted.

The CEA refrained from offering a precise growth forecast for the current fiscal due to the existence of several variables. However, he said the time of a recovery will decide whether the country will witness a contraction in this fiscal or not. Earlier, he had predicted 1.5-2% growth for FY21, with a contraction in the first half. This will be followed by a V-shaped recovery, he had said, drawing a parallel with a similar rebound witnessed after the Spanish flu outbreak, which was, in fact, much more devastating.

The government has considered several options to finance increasing fiscal deficit in the wake of the Covid-19 crisis and asking the central bank to print more money is one of them, he said.

Global rating agency Standard & Poor’s (S&P) on Wednesday affirmed India’s sovereign rating at ‘BBB-‘, the lowest investment grade, and retained the ‘stable’ outlook. Its commentary also reflected its continued confidence in the country’s long-term growth potential, despite exacerbated fiscal settings. S&P’s rating action was in contrast with Moody’s recent citing of the challenges faced by India’s policy-makers in mitigating the risks of a “sustained period of relatively low growth”. Moody’s last week downgraded India’s sovereign rating by a notch to the lowest investment grade of Baa-3 and retained the “negative” outlook.

However, while S&P predicted India’s GDP to shrink 5% in FY21, it said growth could recover rather smartly on the low base to 8.5% in FY22. The general government’s fiscal deficit could spike to 11% of the GDP this fiscal, given the additional expenditure measures to mitigate the impact of the Covid-19 crisis and a much weaker revenue outlook, it prognosticated, adding that, the deficit might decline meaningfully next year to well below 10% of the GDP.

The ongoing economic reforms, if executed well, should keep the country’s growth rate ahead of peers, S&P said. Separately, Fitch Ratings said on Wednesday that India’s economy is forecast to bounce back with a sharp growth rate of 9.5% in FY22, although it will likely contract by 5%. It also said there was greater confidence in a sustained reduction in general government debt over the medium term to a level closer to ‘BBB’ peer median. Also, it indicated that there is possibility of higher sustained investment and growth rates without the creation of macro economic imbalances, such as from successful structural reforms implementation.

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