India’s government debt could mount to 81% of GDP by 2024 even at the pre-COVID rate of growth, warns Moody’s

• Moody's Investors Service said India’s Baa2 negative rating is unlikely to improve given the economic shock triggered by the coronavirus outbreak.
  
  
• However, the report noted that the COVID-19 crisis has only exacerbated the impact of some of India’s existing evils.
  
  
• The $2.7 trillion economy, the seventh largest in the world, is riddled by low household income, high government debt, and weak policy reforms and implementation.

Moody's Investors Service said India’s Baa2 negative rating ⁠— while cutting growth estimate for the year to 0.2% ⁠— down from our previous forecast of 2.5%. is unlikely to improve given the economic shock triggered by the coronavirus outbreak. Over the next five years, India’s government debt could be as high as 81% of the country’s gross domestic product, it said.

However, the report noted that the COVID-19 crisis has only exacerbated the impact of some of India’s existing evils. The world’s largest democracy is riddled by low household income, high government debt, and weak policy reforms and implementation.

At about 72% of estimated 2019 GDP, India's general government debt burden is 53% higher than the median countries with similar rating. What makes it worse is that nearly a quarter of the government’s revenue goes into paying interest on debt. “Under average nominal GDP growth of 9.8%, which we project as the medium-term baseline for the three years through the fiscal year ending March 2024 (fiscal 2023), we expect debt to stabilize at around 81% of GDP,” the report said.

The 9.8% nominal growth assumed by Moody’s was the rate at which India grew before the coronavirus struck. If the recovery takes longer, the debt may rise even further.

Coronavirus just increased the risk from existing flaws

The rural stress and rising joblessness reflect the declining quality of India’s economic growth has declined in recent years. “India's per-capita income increased to about $7,900 on a purchasing power parity basis in 2018, from around $3,600 in 2007, but still much lower than the Baa-rated median of $25,675. Such low incomes limit households' capacity to absorb shocks, whether domestic, external or weather-related,” the Moody’s report said.

India’s large low-income population may struggle to withstand COVID-19 crisis and that may lead to more bad loans. And that, in turn, will further weaken India’s already fragile banking system. The government revenue, which is about 21% of GDP, will fall and debt will rise in the coming years, is the rationale for Moody’s take.

The sharp fall in oil prices, and the huge stash of dollars lying with the Reserve Bank of India may soften the blow.

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