Gene Fang, associate MD, sovereign risk group, Moody’s Investors Service.
Gene Fang, associate MD, sovereign risk group, Moody’s Investors Service.

‘Downside risk to growth shows that India’s debt burden will rise’

  • India’s sovereign rating will face downward risk if its fiscal metrics were to increasingly weaken materially
  • The downside risk to growth also points to risks that, instead of falling as expected previously, India’s debt burden will gradually rise

India’s sovereign rating will face downward risks if its fiscal metrics were to “increasingly weaken materially," Gene Fang, associate managing director, sovereign risk group, Moody’s Investors Service, said after the rating agency on Friday changed India’s sovereign rating outlook from stable to negative.

Edited excerpts from an email interview:

Moody’s was an outlier among rating agencies to upgrade India’s sovereign rating two years ago. On hindsight, was it a mistake?

At the time of the upgrade in 2017, we had changed the rating based on our expectation that continued progress on economic and institutional reforms will, over time, enhance India’s high growth potential, its large and stable financing base for government debt, and will likely contribute to a gradual decline in the general government debt burden over the medium-term.

Currently, we consider the prospects for effective implementation of such reforms to have diminished since the upgrade in 2017.

As a result, risks have increased that economic growth will remain materially lower than in the past, leading to a gradual rise in the debt burden from already high levels.

What are the downward risks that could lead to a rating downgrade for India?

India’s sovereign rating will face downward risk if its fiscal metrics were to increasingly weaken materially.

This would probably happen in the context of a prolonged or deep slowdown in growth, with only limited prospects that the government would be able to restore stronger growth through economic and institutional reforms.

Also, a marked and long-lasting weakening in the health of the financial sector will both raise the associated fiscal costs, should the government need to support some institutions and increase the risk that growth remains too low to prevent a rise in the debt burden.

Why does Moody’s believe that prospects for economic and institutional reforms in India has diminished?

We have highlighted that potential gross domestic product (GDP) growth and employment generation will remain constrained unless reforms are advanced to directly reduce restrictions on the productivity of labour and land, stimulate private sector investment, and sustainably strengthen the financial sector.

We believe the prospects for effective implementation of such reforms to have diminished since our upgrade of the rating in 2017.

Is reviving growth through a fiscal stimulus more imperative for India, or should it strictly follow the fiscal consolidation road map?

One of the drivers behind the change of the outlook from stable to negative is the rising risk of an entrenched growth slowdown, as medium-term reform prospects have dimmed and stress in the financial sector has increased.

The downside risk to growth also points to risks that, instead of falling as expected previously, India’s debt burden will gradually rise.

Was the finance ministry consulted before the rating action?

Our interactions with issuers are confidential and, hence, we won’t be able to comment.

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