FRBM proposal for debt to GDP ratio may come in way of an early ratings upgrade: SBI Research

India’s sovereign rating may not be upgraded soon despite robust macro fundamentals, says a note by State Bank of India’s research team. SBI’s note blames the FRBM Committee which has recommended that India should attain 60% Debt to GDP ratio, by 2023. It says that rating agencies will treat this as an excuse for maintaining a status quo, despite other visible advances made by India.

India has been rated at BBB- at the lowest notch of investment grade rating by major global rating firms and has had a net rating upgrade only once in the last 25 years.

One of the common justification for the status quo is that India’s high debt to GDP ratio. At 69.5%,it is on the higher side and crowds out private investment. The SBI research note says this is a fundamentally flawed argument.

It notes that there are a number of countries which are rated above India but have a significantly higher gross general government debt. In fact, most of these countries have debt positions which have been worsening over time but that has not affected their ratings much. This could be because other macro fundamentals are strong they have the advantage of already being a developed country.

But India has been regularly reducing its debt to GDP ratio, it says . From a a peak of 84% in 2003, it has come down to 69.5 % in 2016. If we look at only public debt it amounts to 42% of GDP of which only around 4% is the external debt.

Besides public debt is mostly internal, it says. As a conscious strategy foreign currency debt component is very low in India. Overseas investors account for only 4% in the total government bonds and the majority of investments come from local banks, insurance companies, RBI and provident funds.

Ironically, Japan has a composition of domestic debt profile almost similar to India, but is rated higher at A+ despite a debt/GDP ratio of 239%.