India fiscal health weak for quantitative easing, says Moody's

A quantitative easing (QE) programme by the Reserve Bank of India (RBI) may not go well with the country’s fundamentals, even as it bought Rs 3.13 trillion of debt from the secondary market in the last fiscal year and committed to Rs 1 trillion of bond purchase in the first quarter.

India is among the 11 emerging markets (EMs) that have jumped on the QE bandwagon. But it has one of the highest public debts and weakest debt affordability, global rating agency Moody’s said on Wednesday.

Chile, Colombia, Croatia, Ghana, Hungary, India, Indonesia, the Philippines, Poland, South Africa and Turkey have recently announced their own versions of QE, so far the reserve of developed economies. But the fundamentals of these economies vary widely.

While most of the 11 EM central banks score well in Moody’s assessment of macroeconomic stability, “with the exception of Chile, most of the 11 EMs have weak government effectiveness, suggesting pote­ntial risks executing fiscal ref­orms or consolidation plans”.

“Debt affordability varies widely, with Ghana and India (Baa3 negative) weakest,” Moody’s said.

Also, “across the 11 EMs, India, South Africa and Ghana have the highest public debt and weakest debt affordability”.

A number of EMs score quite weakly on government effectiveness (close to 0), suggesting they may find it more difficult to implement fiscal reforms or consolidation. Ind­ia’s score at 0.17, per Moody’s methodology, lands it at the seventh spot in the list of 11.

Echoing Moody’s finding, UBS economist Tanvee Gupta Jain pointed out India’s public debt (as a percentage of GDP) has risen from 72 per cent in FY20 to 89 per cent in FY21.

“Our estimates indicate that nominal GDP needs to grow at least 10 per cent YoY to help stabilise public debt levels at the current high levels bef­ore bringing it down,” she said.

Among global EMs, India will have the third-highest public debt to GDP ratio, after Argentina and Brazil, in 2021. “We believe the key for debt sustainability is the ability and speed with which the government can deliver on promises made in the Budget, specifically with regard to aggressive divestment/privatisation targets and also higher public capex spending to help support nominal GDP growth,” she said.