Moody's Investors Service on Thursday said India's weak fiscal position will remain a key credit challenge in 2021 with high debt to GDP ratio well above its peers. The rating agency has currently assigned India the lowest investment grade Baa3 with negative outlook.
"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, a Moody's Associate Managing Director said.
Finance minister Nirmala Sitharaman in her latest Budget has pegged the centre’s fiscal deficit at 6.8% of GDP for FY22 promising to bring it down to 4.5% of GDP by FY26. The 15th Finance Commission has recommended bringing the public debt to GDP ratio down from 89.8% of GDP in FY21 to 85.7% of GDP in FY26.
According to Moody's, the prospects for fiscal consolidation remain weak particularly given the government's mixed track record of implementing revenue-raising measures. “Although the government has not provided an explicit medium-term fiscal consolidation road map, according to its budget speech it targets a fiscal deficit of 4.5% of GDP by fiscal 2026, which amounts to an average annual deficit reduction of about 0.5% of GDP over four years. Given India's very high debt burden, this gradual pace of consolidation will prevent any material strengthening in the government's fiscal position over the medium term, unless nominal GDP growth picks up sustainably to reach much higher rates than historically recorded," the rating agency said in a statement.
Moody’s expects India GDP to contract 7% in FY21 and bounce back in FY22 to grow at 13.7%. “That reflects normalization of activity over a very pronounced base effect. I would not read too much into that number but certainly it does incorporate the expectation that recovery in activity will continue. We will see that reinforced by some degree of vaccine rollout and growing confidence in the market. For FY23 and FY24, we are expecting growth to come around 6.2% reflecting further normalization in activity," Fang said.
The latest Economic Survey has projected GDP growth at 11% for FY22 while the Reserve Bank of India has pegged it at 10.5%.
Fang said policy implementation rather than reforms themselves has been a problem area for India from sovereign rating perspective. “Preceding the downgrade to Baa3 (in June 2020), we took note of the fact that several reforms which would have been very supportive of credit profile were probably less effective due to challenges in implementation. For example Goods and Services Tax was a very important reform that was credit positive but fell short of government’s target and the rollout was also a complex one. Similarly, the bankruptcy and resolution regime was also a very positive step in terms of clearing out the backlog of bad assets but the implementation around that probably was slower than one might have expected. We do have some concern around policy implementation going forward and some of that is pegged into our negative outlook," he added.
Rating agencies Moody’s and its Indian arm ICRA Ltd have given a stable outlook for Indian corporate as consumption and investment demand show signs of recovery but caution that the pandemic threat still looms large. While Moody's said that the government measures and funding environment will boost corporate and infrastructure recovery, ICRA said that the recovery will be led by sectors such as ferrous and non-ferrrous metals, auto and textiles.
Both the rating agencies also believe that asset quality performance of Indian banks will be better than expected but capital needs remain at public sector banks. According to ICRA, public sector banks will require upto ₹430 billion of capital during fiscal year 2022. the outlook on non-bank finance companies continue to be negative as non-performing assets (NPAs) are expected to remain elevated and the sector will require additional funding of ₹1.9-2.2 trillion to support growth and refinancing of existing lines in the next financial year.
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