By Siddhi Nayak
MUMBAI (Reuters) – Despite the Indian government’s efforts to consolidate its fiscal position, a sovereign rating upgrade appears challenging due to concerns over high public debt and interest payments, an analyst at Fitch Ratings said in an interview on Monday.
“India’s debt-to-GDP ratio is just above 80% on a general government basis, well above the high-50% range that we see for similar-rated peer countries,” said Jeremy Zook, director of Asia sovereign ratings.
“Those are more structural fiscal factors that are still a constraint for a rating upgrade.”
In August, Fitch affirmed India’s long-term foreign currency issuer rating at ‘BBB-‘ with a stable outlook, citing a strong medium-term growth outlook.
A rating upgrade is important as it can lower borrowing costs, attract foreign investment and boost economic credibility.
As it moves away from targeting fiscal deficit, the government aims to lower its debt-to-GDP ratio to around 50% by March 2031.
While that is broadly achievable, there are many lingering issues that could act as hurdles, Zook said.
“If robust economic activity does not prove to be durable, that could put more pressure on the fiscal side. In case, nominal (GDP) growth slips into single digits, achieving that target could become difficult.”
Zook said India has the space to trim expenditures slightly to still meet the fiscal deficit target, which is set at 4.4% of GDP for the fiscal year starting in April.
The country’s interest-to-revenue ratio, currently at 25%, is also “a big constraint” to an upgrade, Zook said.
“The median for this ratio in the BBB category is about 8% and India is quite a negative outlier in that regard,” he said.
Zook said a continued focus on investment, partially through capex, and on boosting private sector investment is quite important for India to sustain its strong growth rates in the long term.
The ratings agency continues to expect India to grow by 6.4% this fiscal year and by 6.5% next fiscal year.
(Reporting by Siddhi Nayak; Editing by Savio D’Souza)
