The ratings agency Moody’s recently released a statement that said India’s weak growth compared to the high inflation rate that has been prevailing for a while now could affect the debt status of the country over the medium term.
According to Moody’s, a failure to contain the low-growth high-inflation could lead to an inability of the domestic economy to support the government’s debt, which could raise financing costs as well as affect debt ratios. This in turn could negatively affect India’s sovereign rating. So far, the worst of the debt crisis has been averted by the policies put in place by the regulatory authorities but, there is still a risk to government’s debt burden due to the above-mentioned factors. The report from Moody’s shows that India’s financial system has taken in more long-term government debt at low interest rates, though the conditions look more favourable compared to other countries with ratings similar to India.
The Moody’s report titled ‘India’s Government Debt Structure Mitigates Credit Impact of Macro-Economic Imbalances’ says “As macro-economic imbalances have heightened in the last few years, the currency, maturity and interest rate structure of government debt has supported India’s sovereign credit profile and Baa3 rating.”
Moody’s however made it clear that this report was not its base case forecast. The fact that India’s GDP fell from 83% to 66% from 2003 to 2013 shows that the decline in the debt-GDP ratio was much slower than the GDP growth rate. Moody’s also warned that if this situation persists, the government’s debt level could reach as high as the levels last seen in the year 2000.