Fitch Ratings cautions on India’s rising debt

Fitch Ratings on Wednesday hinted that the counter-cyclical policy fiscal support to India’s nascent economic recovery in the FY22 budget may lead to an increase in public debt, which may be viewed negatively from a sovereign rating perspective, while also maintaining that higher government expenditure will support near-term recovery and increased infrastructure spending could boost sustainable medium-term growth rates.

“India’s budget, presented by the government on 1 February, points to a loosening of fiscal policy to support the country’s ongoing economic recovery from the pandemic and will consequently lead to a rise in public debt. The debt/GDP trajectory is core to our sovereign rating assessment, meaning higher deficits and a slower consolidation path will make India’s medium-term growth outlook take on a more critical role in our analysis,” the rating agency said.

Mint reported on February 5 that the finance ministry may temporarily abandon targeting government debt-to-gross domestic product (GDP) ratio as the medium-term anchor for fiscal policy, limiting its focus on the glide path for fiscal deficit at least till FY26.

The government is of the view that it may be difficult to project a public debt-to-GDP ratio as there is no certainty on the growth trajectory, given the pandemic’s economic impact.

Fitch said India entered the pandemic with little fiscal headroom from a rating perspective. “Its general government debt/GDP ratio stood at 72% in 2019, against a median of 42% for ‘BBB’ rated peers. We revised the outlook on India’s ‘BBB-’ rating to negative, from stable, in June 2020, partly owing to our assumptions about the impact of the pandemic on its public finance metrics. The budget’s deficit projections for fiscal years ending March 2022 (FY22) to FY26 are about 1pp (one percentage point) a year above our previous estimates between, which could make it more challenging to put debt/GDP on a downward trajectory,” the rating agency added.

The rating agency expects public debt/GDP to rise above 90% of GDP over the next five years, based on the revised budget targets.

“However, recent reforms and policy measures, including those in the budget, could influence growth expectations and, thus, our debt trajectory forecast,” it added.