Interest payments: skyrocketing debt of the Center could curb productive spending
India’s high public debt of around 90% of gross domestic product (GDP) as a result of the Covid-19 outbreak can potentially inflate interest payments and hurt the ability of the Center and states to boost productive spending, economists and senior executives at global rating agencies told FE.
Given the damage caused by the second wave, some economists expect the fiscal year 22 budget deficit to exceed the 6.8% target by almost a percentage point.
The need of the hour is therefore to quickly revive the growth impulses, which will reinforce the depletion of income and allow the country to reduce its debt, they stressed. It also needs to be followed by a credible roadmap, which should be more sacrosanct than the often relaxed FRBM rules, to reducing debt.
The rapid containment of the second wave and the effective implementation of structural reforms, especially in factors of production, are essential for the country’s growth goals, some of them said. Otherwise, given the precarious financial situation, any threat to the outlook for GDP growth will only increase the accessibility of debt.
According to IMF data, from a peak of 84.2% of GDP in 2003 (since liberalization), the general government debt ratio fell to 66% in 2010, before rising slightly to reach 73 , 9% in 2019. In 2020, a deadly combination of a Covid-induced GDP contraction and massive borrowing to support spending inflated the debt ratio to 89.6%.
Jeremy Zook, Director (Sovereign Ratings) at Fitch Ratings, told FE: “We don’t expect India’s debt ratio to drop back to its pre-pandemic level of 73.9% in the next 5 years. . ” Fitch expected the FY22 debt-to-equity ratio to decline 2.5 percentage points from the 90.6% estimated in FY 21. But this “will have to be reassessed” as a result of the second wave, Zook said.
William Foster, Vice President and Director of Credit (Sovereign Risk) at Moody’s, said: “The affordability of (India’s) debt will remain relatively low, with interest payments reaching around 28% of government revenues. public in 2021, the highest among Baa-rated peers. and more than three times the Baa median forecast of about 8%. “
Favor the expected stabilization of the debt at around 92% of GDP by 25, against 88.9% (Moody’s estimate) in FY21. This is one of the less optimistic projections of India’s debt profile; other agencies predict that the burden will be relieved with a resumption of economic growth.
Unsurprisingly, a significant share of resources is devoted to interest payments, which climbed to 28.5% of government revenue last year, from 22.9% in FY20. That figure is expected to drop to 27.5% in FY22 before rising to 28.3% in the next fiscal year, Moody’s said.
M Govinda Rao, member of the 14th Finance Committee and current chief economic adviser of Brickwork Ratings, said: “Even if the consolidation path of the 15th Finance Committee is strictly followed, the Centre’s debt is expected to drop from 62, 9% in FY21 at 56.6. % in FY26. This means that interest payments will remain at high levels and continue to crowd out more productive spending. “
The FRBM panel led by NK Singh suggested in 2017 that general government debt be capped at 60% of GDP by fiscal year 23. However, Singh, who also headed the 15th Finance Committee, recently said in interviews that given the unprecedented Covid crisis, the Center and States may exceed their FRBM limits. But once the pandemic is dealt with, they must chart a clear path to regain fiscal discipline, Singh said.
However, any roadmap for debt reduction hinges on accelerating economic growth. “Growth-friendly structural reforms and correcting infrastructure deficits could improve the outlook if implemented well in our view,” said Fitch’s Zook.
Certainly, the debt ratios of economies around the world have increased in the wake of the pandemic. According to an IMF estimate, given the widening deficits and the contraction of economic activity, global debt jumped to 97% of GDP in 2020. It will rise to 99% in 2021 before stabilizing. below but close to 100% of GDP it added.
Importantly, the FY20 Economic Survey pointed out that India’s foreign exchange reserves, which stood at $ 584 billion as of January 15, 2021, were greater than its total external debt (including including that of the private sector) of $ 556 billion in September 2020. has since increased, reaching a record high of $ 593 billion as of May 21. “In the parlance of corporate finance, therefore, India looks like a company with negative debt, with zero probability of default by definition.”
In addition, in the interest of growth, the government budgeted an impressive 26.2% increase in capital spending, which has a high multiplier effect, for fiscal year 22. Of course, the budget calculations are in danger of going haywire. again due to the second wave of the pandemic.
The government has also confirmed a roadmap for capital investments of Rs 111 lakh crore in infrastructure up to FY25. However, attracting large-scale patient capital to infrastructure is unlikely to be easy despite the establishment of a development finance institution.
Regarding the current fiscal situation, Sonal Varma, chief economist, India and Asia (excluding Japan) at Nomura, said revenue would likely be affected in the June quarter due to the second wave. “However, as we expect the economic recovery to pick up after June, we should see a rebound in tax collections thereafter. A major risk is any delay in divestment plans due to the second wave disruptions which jeopardize the ambitious target of Rs 1.75 lakh crore (~ 0.8% of GDP), ”Varma said.
Several agencies, including Barclays, Nomura, S&P and Moody’s, recently cut their India growth forecasts for FY22, with a few cutting their projections by four percentage points to just over 9%, as the second wave of Covid was hitting businesses. This compounded the concerns of policymakers who previously expected a V-shaped recovery after the first wave.