India faces the risk of sovereign debt levels climbing higher if economic growth isn’t robust enough and could ultimately put pressure on the government’s ability to fund itself, Moody’s Investors Service has warned. “India’s government debt to GDP ratio, which we forecast to fall to 65.7 per cent in 2016 from 67.5 per cent in 2015, is well above the median for Baa-rated sovereigns but in a gradual declining trend,” Moody’s said in a report.
“Debt interest payments as a proportion of revenues are more than double the median for similarly rated peers, at over 20 per cent. This reflects the government's narrow revenue base.”
However, robust private savings, capital controls and bank liquidity requirements allow India to sustain debt that is higher than its peers, the credit ratings agency said. While policy moves are likely to enhance India’s medium-term economic strength, the constrained fiscal space available with the government puts India at risk in the event of slower-than-expected growth, the report notes. “On the flipside, India’s government has little fiscal space to stimulate the economy if momentum were to slow,” Moody’s said.
“In the absence of robust growth, India’s debt could start to climb, and ultimately put pressure on the government’s ability to fund itself.” Regarding India’s corporate sector, Moody’s observed that although the growth of private debt was modest, the level of non-performing assets was leading to increased stress on state-owned bank balance sheets.
“In India, corporate debt stands at 49.9 per cent of GDP, and has been broadly stable for the past five years,” Moody’s said. “However, poor profitability and concentration of leverage suggest some risk.
“The main threat to the sovereign credit profile would be via a significant and prolonged worsening in asset quality at state-owned banks, beyond the recognition of bad loans currently underway, that causes contingent liabilities to crystallise on the government's balance sheet,” it said.
