Moody's: Indian financial system can face grave risks due to rising government debt

The government of India borrows every year to make up for the spending needs. Its debt is increasing every year.


The Indian financial system’s ability to absorb rising government debt could diminish significantly if the combination of low economic growth and high inflation persists

India’s general government debt as a proportion of gross domestic product (GDP) fell to 66% from 83%, despite a fiscal deficit that averaged 7% over that period. The drop in the government debt-to-GDP ratio was due to government debt and interest payments growing at a slower pace than nominal GDP growth.

“As macro-economic imbalances have heightened in the last few years, the currency, maturity and interest rate structure of government debt has supported India’s sovereign credit profile and Baa3 rating,” said Sheth. In the last three years, as interest rates have increased and growth has slowed, India’s interest-growth differential has narrowed, yet it remains more favourable than in many similarly rated countries, and is a factor underpinning government debt sustainability. India’s government debt to GDP ratio was still the highest among major developing countries at 67.9 in 2013, compared with 60.3 for Brazil, 42.9 for the Philippines, 24.5 for Indonesia and 34.4 for Turkey.

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Interest paid by the Indian Government on debt since 1970 - see Chart: (Ref2)

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