Fitch flags risks from India’s slow pace of debt reduction

Concerns over high public debt and interest payments are a big hurdle to effecting a sovereign rating upgrade despite India’s efforts to stick to the fiscal consolidation glide path, rating firm Fitch said.

The Indian government’s efforts to achieve medium-term debt reduction target is a positive step that, if adhered to, could improve the country’s credit profile over time, Fitch Ratings said.

India’s debt-to-gross domestic product (GDP) ratio is currently above 80%, which is higher than the mid-50% range typical for countries with similar ratings, Jeremy Zook, a director of Asia sovereign ratings at Fitch, said in an interview to Reuters this week.

Zook said this structural issue substantially hinders any potential rating upgrade.

While moving away from solely focusing on fiscal deficit targets, the government has set a target of achieving a 50% debt-to-GDP ratio by March 2031.

While this goal is achievable, it hinges on sustained economic growth, Fitch said, with Zook warning that if economic activity does not remain robust, the fiscal situation may worsen further, complicating India’s target to meet debt reduction.

“While India is making strides towards fiscal consolidation, the high level of public debt and associated interest payments create challenges that could hinder a rating upgrade in the near future,” Zook said.

Last August, Fitch affirmed India’s long-term foreign currency issuer rating at ‘BBB-‘ with a stable outlook.

Credit rating agencies use a structured rating scale to evaluate entities’ creditworthiness.

These ratings have two main categories: investment grade and non-investment grade (speculative grade).

The BBB rating is the fourth-ranking, with AAA, AA, and A being the top three ranking in the investment grade category, indicating a lower risk of default.

The rating BBB indicates an entity has good rating quality but is exposed to economic changes.

The rating upgrade enables entities to lower borrowing costs, attract foreign investment, and boost economic credibility.

“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 needs to reduce its expenditures slightly to meet the fiscal deficit target of 4.4% of GDP for the fiscal year starting on 1 April 2025, Zook said, adding that India’s interest-to-revenue ratio, pegged at 25%, is also “a big constraint” to an upgrade.

The ratings agency expects India’s growth to be 6.4% in FY25 and 6.5% next fiscal year.