If India reduced to junk status, all bets are off
Given India’s foreign borrowings are limited and the government’s ability to raise local funds is unlimited, though the rates rise when spending gets out of control, lowered credit ratings are easy to dismiss—finance minister Pranab Mukherjee said Fitch’s actions on Monday were based on old data! The problem, however, is that with S&P also lowering India’s outlook in April, and last week threatening it may actually go down to junk status if the government didn’t get its act together, investor perception is slowly getting hit. At junk level, should this happen, things will take a really bad turn since funds obligated by law to invest in investment-grade paper may have to pull out of India—so while the government bravado may be all right now, the window of opportunity is rapidly closing.
While India’s finance ministry has its own CRIS rating which shows India’s relative ranking is rising in the world, and takes pride in India’s debt levels being manageable, and falling relative to GDP, Fitch highlights precisely this. As compared to the ‘BBB’ median level of 39%, Fitch says India’s government debt of 66% of GDP is too high. Right now, even if GDP grows at 12-13% in nominal terms, India’s debt-to-GDP will keep falling, but there have been years when it has risen. Higher debt levels may be manageable, but they take away from expenditure on other goods—at R4,44,061 crore in 2012-13, the projected debt service-to-GDP ratio is a high 4.3%. As a proportion of the fiscal deficit, debt servicing costs fell from 1.02 in 2010-11 to 0.76 in 2011-12 but are projected to rise to 0.86 in 2012-13. As we’ve seen in the case of India’s forex reserves where the ratio of reserves to short term debt by remaining maturity has fallen from 3 in 2007 to an estimated 1.5 this year, the room for manoeuvre is rapidly getting smaller.