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Moody’s Says Indian Debt Level ‘Constraint’ on Sovereign Rating

November 30, 2011

Nov. 17 (Bloomberg) -- India’s public debt at 70 percent of its gross domestic product is preventing Asia’s third-biggest economy from securing an investment-grade rating, Moody’s Investors Service said.

The nation’s fiscal deficit and “the debt burden, which is high relative to similarly rated countries,” are among the constraints, Atsi Sheth, a sovereign analyst at Moody’s, said in a telephone interview from Mumbai yesterday. “For the ratings to be improved, we will have to be comfortable that India’s government debt is at a level that can be sustained over the medium term.”

India’s finance ministry pitched for a higher rating in a meeting with Moody’s officials on Nov. 14, R. Gopalan, secretary, Department of Economic Affairs, said a day later. The government raised its planned borrowing for the six months through March 31 by 32 percent as revenue collections fall short of target. Finance Minister Pranab Mukherjee said Oct. 4 that it may be hard to meet his goal of cutting the budget deficit to a four-year low of 4.6 percent of GDP.

Moody’s rates India’s rupee sovereign debt a Ba1, the highest junk grade, a level shared by Indonesia and Morocco. India’s foreign-currency debt is rated at Baa3, the lowest investment grade. Sheth, who declined to comment on the lobbying by the finance ministry, expects the budget gap to be as high as 5.5 percent in the year ending March 31. Mukherjee said yesterday the government isn’t revising its deficit target yet.

Rising Bond Yields

The yield on the benchmark 10-year government bond has risen 96 basis points this year, the most in Asia, to 8.88 percent, as inflation remained untamed above 9 percent for a 11th consecutive month in October, while increased supply damped demand. The Reserve Bank of India has increased borrowing costs 13 times starting March, 2010, to slow the pace of price gains, and expects inflation will cool to 7 percent by the end of March.

“It might be optimistic to expect a rating upgrade at this juncture when there are significant risks” on account of the deficit, said Suvodeep Rakshit, an economist at Kotak Securities Ltd. in Mumbai. “The government’s finances are under severe pressure this year due to slowing growth and higher rates.”

Slowing economic growth may also exacerbate the deficit, Sheth said. The $1.7 trillion economy is likely to expand 7.6 percent in the fiscal year to March, 2012, slower than 8.5 percent in the previous year, according to the central bank.

“The deficit is going to be higher due to growth slowdown,” Sheth said. “Growth and profitability have been lower than the government had assumed and that will be reflected in revenue growth.”

Revenue Collection

India’s receipts grew 38.7 percent in the six months to September from a year earlier, slower than 58.4 percent gain in the same period a year ago, according to government estimates. Fourteen of the 30 companies that comprise the benchmark Sensitive Index reported profits that fell short of analyst estimates in the quarter ended Sept. 30.

The government will also spend more on oil and food subsidies, she said. The state caps retail prices of fuels including diesel, cooking gas and kerosene to rein in inflation and shield about 828 million people the World Bank says live on less than $2 a day.

Standard & Poor’s and Fitch Ratings have a BBB- rating on India’s local-currency debt, the lowest level in the investment category.

“A high debt burden, we believe, limits the fiscal flexibility that the government has to respond to future shocks, as well as invest in India’s social and physical infrastructure Needs,” Sheth said.

--Editors: Sam Nagarajan, Abhay Singh

To contact the reporter on this story: Kartik Goyal in New Delhi at

To contact the editor responsible for this story: Stephanie Phang at

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