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India's debt-to-GDP to surge to 87% in FY21; rating downgrade looms large: SBI Ecowrap

India's debt-to-GDP to surge to 87% in FY21; rating downgrade looms large: SBI Ecowrap

The report stated that the higher level of borrowings and a collapsing GDP this fiscal may lead to an increase in the country's debt-to-GDP ratio to around Rs 170 lakh crore in FY21 from Rs 146.9 lakh crore in FY20

The debt-to-GDP ratio shows how likely a country is to pay off its debt The debt-to-GDP ratio shows how likely a country is to pay off its debt

The economic turmoil caused by COVID-19 pandemic may push India's gross debt to 87.6 per cent of the Gross Domestic Product (GDP) in FY21 from 72.2 per cent in FY20, according to State Bank of India's research note 'Ecowrap' released on Monday.

The report stated that the higher level of borrowings by the government and a collapsing GDP this fiscal may lead to an increase in the country's debt-to-GDP ratio to around Rs 170 lakh crore (in FY21) from Rs 146.9 lakh crore (in FY20).

"India's debt-to-GDP ratio has increased gradually from Rs 58.8 lakh crore (67.4 per cent of GDP) in FY12 to Rs 146.9 lakh crore (72.2 per cent of GDP) in FY20," the SBI report said.

The debt-to-GDP ratio shows how likely a country is to pay off its debt. The higher the ratio, the less likely the country will repay its debt and the higher its risk of default. Investors often look at this ratio to evaluate the government's ability to fund its debt. According to a World Bank report, if the debt-to-GDP ratio of a country exceeds 77% for a prolonged duration, it slows down economic growth.

Also Read: Coronavirus impact: India's GDP growth in FY21 to contract 4.5%, says FICCI

Rating downgrade fear looms large

The research note further highlighted that the fear of a rating downgrade looms large in FY21. However, this will not be because of fiscal problems but because of the steps India has taken to revive growth.

"We again reiterate that the current thinking of rating downgrade in policy circles is a false negative, as India's rating is likely to face a litmus test of downgrade in FY21 depending on what we have done to bring growth back on track," SBI Economic Research said.

Bright side

However, the research note indicated towards a silver lining of falling yields on both central and state government bonds which will help the Centre bring down its debt servicing costs.

"The weighted average cut off yield for states has so far reduced significantly to 6.49% compared to 7.23% in FY20. For the Centre, the rate has come down to 4.53% in FY21 from 6.85% in FY20. This, in turn, might help in significantly reducing interest costs," the report mentioned.

The research note added that the external debt, in the expected gross debt for FY21, is likely to rise to Rs 6.8 lakh crore, 3.5 per cent of GDP, while of the remaining domestic debt, "component of state's debt is expected at 27 per cent of GDP".

Also Read: Coronavirus impact: India's GDP may contract 6% in FY21, says Citi

Word of caution

Meanwhile, the report cautioned that the higher debt amount will also result in shifting of the fiscal responsibility and Budget Management (FRBM) target of combined debt (of the Centre and states) to "60 per cent of GDP by FY23 by seven years." It added that the target "seems achievable in FY30 only".

Fiscal estimates have gone askew across countries in the wake of pandemic-related outlays. Falling GDP growth coupled with a higher debt-to-GDP ratio has proved detrimental to economies around the world.

Elaborating on the present situation in India, the report emphasised the bigger question which is the sustainability of debt. It underscored that given the present situation "our nominal GDP growth is likely to contract significantly" due to which "our interest-growth differential will turn positive in FY21, thus raising serious questions on debt sustainability."

The note, however, cast no doubt on the government's ability to service its debt obligations as its current level of foreign exchange reserves are sufficient to meet any external debt commitments.

That said, the report noted that the country's GDP collapse may push up "the debt-to-GDP ratio by at least 4 per cent" implying that "growth rather than continued fiscal conservatism is the only mantra" to get India back on track.

Also Read: India's GDP to contract 5.3% in FY21 amid coronavirus impact, will rebound in FY22: Ind-Ra

Published on: Jul 21, 2020, 2:18 PM IST
Posted by: Manali, Jul 21, 2020, 2:18 PM IST