India’s debt remains `significantly’ high, higher than Bahamas and South Africa, says Moody’s – Economic Times

by Anirban Nag

India's debt level is "significantly" higher compared with similarly rated countries, Moodys Investor Service said, firing a fresh salvo at Prime Minister Narendra Modis government, which has been trying hard to earn a sovereign upgrade.

Rating agencies have India just above junk status and while Modis government has consistently pushed for a sovereign upgrade in the past few years, Moodys, Standard & Poors and Fitch Ratings have all pushed back, citing high debt levels. On Thursday, Moodys said that while the general government debt level declined to 67.5 percent of gross domestic product in 2016 from 84.7 percent in 2003, it remains a key credit constraint.

Moodys notes that Indias debt burden is higher than most of its Baa peers including the Bahamas and South Africa. Baa is medium-grade credit risk which may have speculative characteristics, according to Moodys. Moodys India rating is at Baa3, the lowest on that rung.

"We view ongoing central government deficit reduction as supportive of Indias credit profile, Moodys said in a note. However, the recent widening of Indian state deficits has more than offset the narrowing of the central government deficit."

Finance Minister Arun Jaitley in his February budget speech reiterated New Delhis commitment to fiscal consolidation, pegging the central government fiscal deficit targets at 3.2 percent of GDP for fiscal 2017-18 and 3 percent for 2018-19, down from 3.5 percent in 2016-17.

Moodys said a new medium-term fiscal framework would help guide the fiscal consolidation process, if adhered to. The new framework, which has been recently proposed, aims to bring down the federal government fiscal-deficit target to 2.5 percent by 2023 while reducing the debt-to-GDP ratio to 60 percent by 2023.

Moodys was upbeat about Indias move to adopt a unified tax code for goods and services, scheduled to be implemented on July 1.

"Over the medium term, goods and services tax will contribute to productivity gains and higher GDP growth by improving ease of doing business, unifying markets and will enhance Indias attractiveness as a foreign investment destination. GST will also support higher government revenue generation through improved tax compliance and administration," it said.

Nevertheless, the high levels of bad loans in the banking system were a key risk to growth, Moodys said, adding India would need to resolve it to kickstart the investment cycle.

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India's debt remains `significantly' high, higher than Bahamas and South Africa, says Moody's - Economic Times