S&P Says India’s Weaker Public Finances Balanced Against Strengthening Growth

India’s public finances, which have weakened as a consequence of the Covid-19 crisis, are balanced well against the economy’s strengthening growth prospects, according to S&P Global Ratings.

The widening of central and state government deficits and the higher debt-to-GDP ratio were believed to be a potential downside risk to India’s sovereign rating. That downside is being balanced by the expected sharp rebound in growth. But lower-than-expected growth in the future may cause strain and force a rethink on ratings, it cautioned.

India is set to record a solid sequential recovery in 2021-22 fiscal, Andrew Wood, director, sovereign ratings at S&P Global Ratings, said in a webinar on Wednesday. The economy has demonstrated a faster-than-anticipated recovery in the ongoing financial year and is expected to grow at about 10% in FY22, he said. That, according to him, will take the economic output back to what it was in FY20, with a permanent loss of production of about 10%.

While a sustained economic recovery will also depend on India’s ability to thoroughly vaccinate its population, a strong growth in real and nominal GDP is crucial in sustaining the Indian government’s wide fiscal shortfall, according to S&P. India is currently rated BBB- with a stable outlook.

The brighter economic prospects are contrasted against the government’s weak fiscal position, which has gotten worse over the course of the pandemic, Wood said. India’s debt was already much higher than peers and shot up by 18 percentage points to about 92% of the GDP in FY21, Wood said, adding that it is unlikely to recede any time soon.

Fiscal deficit increased to 14.5% of the GDP in the current financial year, and is likely to remain close to 11.5% of the GDP in the next financial year, trending slightly below 10% the year after that, Wood said.

“Fiscal consolidation is set to be gradual and relatively slow given how high the fiscal deficit is,” he said. “As such, in case of slower-than-expected pace of GDP growth, we would have increased concerns over the state of fiscal issues.”

Infrastructure To Feel The Pinch

Even as the economy recovers, the hit to the infrastructure sector from Covid-19 will still be felt in 2021, the ratings agency said. Credit risks are rising because of increasing debt levels and a weakening of counterparties, and refinancing remains difficult for speculative grade-rated issuers, S&P said.

While airports are unlikely to see a recovery before 2024, roads have seen a sharp recovery, giving confidence that traffic risk will subside, it said. The power segment will be operationally resilient, but significant overdue receivables are downside risks, S&P said.

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