‘INDIA’S DEBT LEVEL SIGNIFICANTLY HIGHER’
Moody’s warns of ‘key credit constraint’ amid widening of state deficits
INDIA’S general government debt level is “significantly” higher compared with similarly rated countries, said Moody’s Investor Service, firing a fresh salvo at Prime Minister Narendra Modi’s government which has been trying hard to earn a sovereign upgrade.
Rating agencies have India just above “junk” status and while Modi’s government has consistently pushed for a sovereign upgrade in the past few years, Moody’s, Standard & Poor’s and Fitch Ratings have all pushed back, citing high debt levels.
Moody’s said yesterday while the general government debt level declined to 67.5 per cent of gross domestic product last year from 84.7 per cent in 2003, it remained a “key credit constraint”.
Moody’s notes that India’s debt burden is higher than most of its “Baa” peers, including the Bahamas and South Africa.
“Baa” is medium-grade credit risk that may have speculative characteristics, according to Moody’s. Moody’s India rating is at “Baa3”, the lowest on that rung.
“We view ongoing central government deficit reduction as supportive of India’s credit profile,” said Moody’s in a note. “However, the recent widening of Indian state deficits has more than offset the narrowing of the central government deficit."
Finance Minister Arun Jaitley in his February budget speech reiterated New Delhi’s commitment to fiscal consolidation, pegging the central government fiscal deficit targets at 3.2 per cent of gross domestic product (GDP) for fiscal 2017-18 and three per cent for 2018-19, down from 3.5 per cent in 2016-17.
Moody’s said a new mediumterm fiscal framework would help guide the fiscal consolidation process, if adhered to. The new framework, which has been recently proposed, aims to bring down the federal government fiscal-deficit target to 2.5 per cent by 2023 while reducing the debtto-GDP ratio to 60 per cent by 2023.
Moody’s was upbeat about India’s move to adopt a unified tax code for goods and services, scheduled to be implemented on July 1.
“Over the medium term, the Goods and Services Tax will contribute to productivity gains and higher GDP growth by improving ease of doing business, unifying markets and will enhance India’s attractiveness as a foreign investment destination. GST will also support higher government revenue generation through improved tax compliance and administration,” it said.
Nevertheless, the high levels of bad loans in the banking system were a key risk to growth, said Moody’s, adding that India would need to resolve it to kickstart the investment cycle. Bloomberg