India’s Fiscal Position Weak; Nominal GDP Growth Key To Sustain Debt: Moody’s
Fiscal consolidation in India remains weak and will be a key credit challenge given its large debt burden and low medium-term gross domestic product growth, according to Moody’s Investors Services.
Wide fiscal deficits combined with lower real and nominal GDP growth over the medium term will constrain the government’s ability to reduce its debt burden, Gene Fang, associate managing director, sovereign risk group at the global rating agency, said. Also, “considering the pace of fiscal consolidation, what becomes clear is that nominal GDP growth is even more important for the government to stabilise the overall debt to GDP trajectory at the very high levels we are seeing”, Fang said in a conference on India’s credit outlook, co-hosted by Moody’s and ICRA Ltd.
Moody’s has a Baa3 rating on India with a negative outlook.
“The negative outlook that we have on the ratings reflects the uncertainties to the downside that our own growth forecasts will not be met and we will see nominal growth to be weaker than we expect and as a result the trajectory of debt to GDP will continue to rise,” Fang said.
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In view of the recovery seen, especially in the last three months of 2020, GDP growth for India is estimated to rebound to 13.7% for FY22. That being said, there are no significant revisions to medium-term growth outlook. GDP growth in FY23 and FY24 is estimated at about 6.2%.
That level of GDP growth supports nominal GDP growth that will be sufficient to maintain levels of general government debt and the same level of general government debt to GDP that are currently seen.
India remains an outlier relative to Baa-rated peers with its government debt to GDP approaching 90%. That being said, that level of leverage can somewhat stabilise based on the premise that growth will be at 6.2% in real terms for the fiscal year FY23.
The recent India budget tends to tilt in favour of support for growth. The deficit for FY22 was above what was expected, but nevertheless, the deficit target itself is a realistic one.
The government’s assumption of nominal GDP growth is conservative as are its revenue targets with a possible exception of the monetisation expectations of the government.
More importantly, unlike previous years, there is a reduced focus on where the fiscal deficit comes in relative to the Fiscal Responsibility and Budget Management Act. The fiscal framework for India and in many other countries is being dramatically reconsidered in the wake and that is within the scope of expectations.
Looking at longer-term expectations for the deficit to decline to 4.5% in FY26, represents a modest degree of fiscal consolidation and is baked into the baseline forecast.