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India's fast-growing gross domestic product (GDP) is going to be a key driver in bringing down the debt burden and debt affordability is going to be the key determinant of the country's credit profile and fiscal strength, said Moody's Investors Service on Thursday.
“India's fast-growing GDP (which we assume to average 11 per cent in nominal terms) is a key driver of our projections of a downward trend in its debt burden. Given the favourable gap it creates against the average interest rate on debt, it enables the persistence of fiscal deficits with a contained debt burden. As in the past, the key determinant of fiscal strength and the credit profile will be debt affordability and in particular the proportion of revenue absorbed by interest payments,” it said in a note.
India has a relatively high level of general government debt, estimated at around 81.8 per cent of GDP for 2022-23, compared with the Baa-rated median of around 56 per cent.
The country also has a low debt affordability, in terms of general government interest payments as a percentage of revenues, which for India is estimated at 26 per cent for 2022-23, compared with the Baa median of around 8.4 per cent.
"At 26 per cent currently, it is a large proportion, which, if not further addressed via a continued broadening of the revenue base, will remain an important constraint on the government's ability to provide more support for growth and address developmental needs," Moody's added.
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Globally, debt burdens will fall in most, but not all advanced economies as debt continues to rise in France, Italy and the United States of America (USA) which are facing ageing-related long-term increases in spending.
“These sovereigns' credit standing will increasingly depend on their ability to attract savings to contain the deterioration in debt affordability and manage the implied budget constraints, without which downward rating pressure will materialise over time. This will involve overcoming political economic hurdles to implement policy that takes into account the constrained availability of government resources while optimising their economic and social impacts,” it said.
Moody's has a 'Baa3' sovereign credit rating on India, with a stable outlook. Baa3 is the lowest investment grade rating. On Friday, Moody's is scheduled to meet Indian government officials during which the latter is likely to make a strong pitch for a sovereign rating upgrade.
