Despite recent improvements, the fiscal deficit and debt-to-GDP ratio remain wider than pre-pandemic levels, with debt servicing costs continuing to take up the largest portion of the budget, even surpassing infrastructure spending. To secure a rating upgrade, significant improvements in both the debt burden and debt affordability are necessary.
It is not merely narrower fiscal deficits,”but material improvements in the debt burden and debt affordability” that will help in triggering a rating upgrade, Guzman emphasized. He said that Moody’s assesses debt affordability by examining metrics like interest payments as a percentage of revenue. Even though the debt has reduced slightly in recent years, the high interest payments remain a burden. At the same time, he said the debt servicing costs that are associated with this high debt burden continue to be the largest portion of the budget, even higher than infrastructure spending.
Despite weaker-than-expected growth in recent quarters, Moody’s maintains a favourable growth outlook for India compared to other economies.
“Over the past couple of quarters and on a forward looking basis, over the next one to two fiscal years, we still expect India to be one of the fastest growing, if not the fastest growing, G20 economy,” Guzman said.
He acknowledged that India’s inflation-targeting framework is relatively new compared to other Asian economies like Thailand, Indonesia, and the Philippines. Nevertheless, India has made notable progress in controlling average inflation during the inflation-targeting period, compared to prior years.
“Core inflation seems to be relatively well anchored, but nevertheless, inflation in India is subject to external shocks, such as the oil, oil prices, forex volatility, and probably most importantly, food price volatility, which is probably more subject to developments that don’t relate to monetary policy, such as inclement weather and climate change,” he added.
