Highest Debt Among Peers Keeps India Outlook Negative at Fitch

(Bloomberg) -- Fitch Ratings retained its negative outlook on India’s sovereign rating that’s barely above junk grade, reflecting concern the country will find it challenging to cut its high public debt.

That’s in contrast with Moody’s Investors Service and S&P Global Ratings, which both have a stable outlook on India’s sovereign score. Fitch highlighted that the country’s general government debt at 89.6% of gross domestic product in the financial year ended March 31 is the highest of similar rated emerging-market sovereigns, in a note published late Tuesday.

Fitch affirmed the country’s sovereign rating at BBB-, the lowest investment grade. Moody’s and S&P also rate India just one step above junk, at Baa3 and BBB-, respectively.

Read: India Skirts Downgrade by Moody’s as Outlook Changed to Stable

“Higher debt levels constrain the government’s ability to respond to shocks and could lead to a crowding out of financing for the private sector,” Fitch said in the note.

Fitch forecasts the ratio of debt to GDP in India to decline to 86.9% by financial year 2026 based on its assumptions of 10.5% nominal growth and the gradual consolidation of the general government primary deficit to 2.5% of GDP. The ratio would still be well above the 60.3% median for the BBB rating category in 2021 at Fitch.

The risks related to India’s high public debt are partly offset by the country’s ability to fund its deficits domestically. Foreign-currency government debt makes only 6% of total debt compared with 33% median for peers.

Still, Fitch warns that failure to put the general government debt to GDP ratio on a downward path or a structurally weaker real GDP growth outlook could lead to a sovereign rating downgrade.

Here are the other key comments in the Fitch note:

• The rating firm forecasts Indian government’s interest payments to revenue to reach 28.2% in financial year 2022 compared with a 6.9% median in 2021 for sovereigns in BBB category at Fitch. This will limit India’s fiscal flexibility
• The government has made headway on India’s potential inclusion in global bond indexes, which could be positive from a credit perspective, as it would open up alternative sources of financing for the government and free up domestic lending
• In light of global inflationary pressures and market expectations for monetary policy tightening around the world, a strengthening of India’s external position in the last couple of years and the relatively closed nature of its capital markets boost the country’s resilience to bouts of financial market volatility

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