Debt limits India’s plan for bigger fiscal boost
Country faces looming threat of credit rating downgrade
MUMBAI: On the night of May 12, India’s Prime Minister Narendra Modi set the nation of 1.3 billion people abuzz with promises of unleashing a massive stimulus to shore up an economy facing its deepest recession in decades.
A week later and after five drawn-out press conferences by his Finance Minister Nirmala Sitharaman, the entire package of about 21 trillion rupees (Us$277bil), or 10% of India’s gross domestic product (GDP), underwhelmed economists and investors alike. Many worked out that the actual fiscal cost amounts to just about 1% of GDP, sending stocks and the rupee down in the immediate aftermath.
The looming threat of a credit rating downgrade to junk may have held officials back from delivering a more immediate boost to the economy through, for example, direct cash handouts to citizens. India is facing public debt levels of 77% of GDP, according to Fitch Ratings Ltd, and a fiscal deficit in double digits this year, putting it on the path for a rating cut.
Authorities are already opening up the bond market and need to borrow more to plug a revenue hole, so they can’t afford to lose an investment grade rating by straining the deficit further.
“The government appears to have given a fair degree of weight to the risks of a downgrade on account of risks from a high fiscal deficit and rising debt-to-gdp ratio – a clear recipe for future instability in macros, especially currency depreciation,” said Shubhada Rao, head of economics at Quanteco Research in Mumbai.
Even after the latest package, “the threat of a downgrade still exists” because of the likely sharp slump in the economy, she said.
According to Prachi Mishra, chief India economist at Goldman Sachs Group Inc, GDP will contract an annualised 45% in the second quarter from the prior three months. For the full year through March 2021, GDP is forecast to decline 5%, which would be deeper than any recession India has ever experienced.
Businesses have been clamouring for more state support to cushion the blow from the harshest stay-at-home rules in the world, which has left millions jobless. Former government officials and central bankers have increasingly called for extraordinary measures to counter the fallout.
India was already under fiscal stress before it entered the current crisis. The economy had been steadily slowing on the back of a credit crunch and slump in consumption, reaching an estimated 5% in the fiscal year through March, the lowest in more than a decade. The government missed its budget deficit target last year and set a goal of 3.5% of GDP for the current fiscal year.
Now, that’s likely to blow out even more as revenues suffer due to slowing growth. Citigroup Inc is forecasting a fiscal deficit of 7.4% of GDP, a level last seen in 1991. Adding the shortfall from India’s 28 states would push up the deficit to 11.4% of GDP.
HSBC Holdings Plc estimates the true fiscal cost, after including borrowings by public sector entities, would stand at 13.3% of GDP this fiscal year. Moreover, the economic package includes government guarantees worth 2.1% of GDP to small and mid-sized businesses and shadow banks – and while that’s not a problem immediately, it would add to the fiscal deficit over time as defaults rise, HSBC said.
That’s a frightening prospect for many, and may invite a downgrade. Fitch Ratings and S&P Global Ratings rate India’s debt at the lowest investment grade level, while Moody’s Investor Service has an assessment one notch higher.