India’s high public debt of around 90% of gross domestic product (GDP) as a result of the Covid-19 outbreak can potentially inflate interest payments and hurt the capacity of the Center as well as states to increase productive spending, economists and senior executives at global rating agencies told FE.
Given the damage caused by the second wave, some economists expect the fiscal year 22 budget deficit to exceed the 6.8% target by almost a percentage point.
The need of the hour is therefore to quickly relaunch the growth impulses, which will strengthen the absorption of income and allow the country to reduce its debt, they stressed. It also needs to be followed by a credible roadmap, which should be more sacrosanct than the often relaxed FRBM rules, to reducing debt.
The rapid containment of the second wave and the effective implementation of structural reforms, especially in factors of production, are essential for the country’s growth goals, some of them said. Otherwise, given the precarious financial situation, any threat to the outlook for GDP growth will only increase the accessibility of debt.
According to IMF data, from a peak of 84.2% of GDP in 2003 (since liberalization), the general government debt ratio eased to 66% in 2010, before rising again for reach 73.9% in 2019. In 2020, a deadly combination of a Covid-induced GDP contraction and massive borrowing to bolster spending inflated the debt ratio to 89.6%.
Jeremy Zook, director (sovereign ratings) at Fitch Ratings, told FE: “We don’t expect India’s debt-to-equity ratio to drop to its pre-pandemic level of 73.9% in the past 5 years. coming years. Fitch expected the FY22 debt-to-equity ratio to drop 2.5 percentage points from the estimated 90.6% for FY21. But that “will have to be reassessed” following the second wave, Zook said.
William Foster, Vice President and Senior Credit Officer (Sovereign Risk) at Moody’s, said: “Accessibility of (India’s) debt will remain relatively low with interest payments reaching around 28% of government revenue. in 2021, the highest among Baa rated peers. and more than three times the median Baa forecast of about 8%. “
Foster expected debt to stabilize at around 92% of GDP by FY25, compared to 88.9% (Moody’s estimate) in FY21. This is one of the less optimistic projections of India’s debt profile; other agencies predict that the burden will ease as economic growth resumes.
Unsurprisingly, a large share of resources is devoted to interest payments, which climbed to 28.5% of general government revenue in the previous fiscal year, compared to 22.9% in fiscal year 20. This figure is expected to drop to 27.5% in FY22 before rising to 28.3% in the next fiscal year, Moody’s said.
M Govinda Rao, member of the 14th Finance Committee and current chief economic adviser of Brickwork Ratings, said: “Even if the consolidation path of the 15th Finance Committee is strictly followed, the Centre’s debt should be reduced by 62%. , 9% in FY21 at 56.6. % in FY26. This means that interest payments will remain at high levels and continue to crowd out more productive spending. “
The FRBM panel led by NK Singh suggested in 2017 that general government debt be capped at 60% of GDP by fiscal year 23. However, Singh, who also headed the 15th Finance Committee, recently said during of interviews that given the unprecedented Covid crisis, the Center and States may exceed their FRBM limits. But once the pandemic is under control, they must chart a clear path to regain fiscal discipline, Singh said.
However, any debt reduction roadmap hinges on a surge in economic growth. “Structural reforms that improve growth and close infrastructure gaps could improve the outlook if implemented well in our view,” said Zook of Fitch.
Certainly, the debt ratios of economies around the world have increased in the aftermath of the pandemic. According to an IMF estimate, given the widening deficits and the contraction of economic activity, global debt climbed to 97% of GDP in 2020. It will reach 99% in 2021 before stabilizing below but close to 100% of GDP, he said. added.
Importantly, the FY2020 economic study highlighted that India’s foreign exchange reserves of $ 584 billion as of January 15, 2021 were greater than its total external debt (including that of the private sector). of $ 556 billion in September 2020. Foreign exchange reserves have since swelled, reaching a record high of $ 593 billion as of May 21. “In corporate finance parlance, then, India looks like a company with negative debt, with a default probability of zero by definition.”
Moreover, with an eye on growth, the government budgeted for an impressive 26.2% increase in capital spending, which has a high multiplier effect, for fiscal year 22. Of course, the budget calculations could again turn out to be. out of whack due to the second pandemic wave.
The government has also established a roadmap for capital investments of Rs 111 lakh crore in infrastructure up to FY25. However, attracting large-scale patient capital to infrastructure is unlikely to be easy despite the establishment of a development finance institution.
Regarding the current budget, Sonal Varma, chief economist, India and Asia (ex-Japan) at Nomura, said revenue would likely be affected in the June quarter due to the second wave. “However, as we expect the economic recovery to pick up after June, we should see a rebound in tax revenues thereafter. A key risk is any delay in divestment plans due to the second wave disruptions that jeopardize the ambitious target of Rs 1.75 lakh crore (~ 0.8% of GDP), ”Varma said.
Several agencies, including Barclays, Nomura, S&P and Moody’s, recently cut their growth forecasts for India for FY22, with a few cutting their projections by as much as four percentage points to just over 9%, as the second wave of Covid hit businesses. This added to the concerns of policymakers who previously expected a V-shaped recovery after the first wave.