Low-hanging fruit: Moody's analyst bets for aggressive debt reduction to improve India's sovereign rating

Setting an ambitious and realistic target for the fiscal deficit 2025-26, India has begun on the right note; however, a more aggressive reduction in government debt would greatly strengthen its sovereign rating profile, an analyst at Moody's Ratings said on Tuesday. In August, Moody's rated India at the lowest investment grade of 'Baa3,' retaining its outlook as stable.

India unveiled a $24 billion splurge on job-creating projects over five years on Tuesday, while separately promising another $32 billion worth of rural development this year.

"A more aggressive reduction in debt levels would be certainly a positive in terms of how we look at India's overall credit profile," Gene Fang, Moody's associate managing director for sovereign risk, told Reuters in an interview.

Interest payments, a big part of government revenues, contribute minimal to economic growth, Fang said, adding that India's sovereign debt is higher than similar-rated peers.

Even with so much ambition in the budget, the government needs to implement structural reforms within India's agriculture and labour markets since problems within the rural economy persist, he added. He also said that though he would welcome the government's target for infrastructure spending this year, such spending has to create opportunities that attract more private sector investment.

He also pointed out that the coalition nature of the government headed by Prime Minister Narendra Modi might throw up challenges in implementing big-ticket economic reforms.

"It remains to be seen how much the coalition (government) is able to get more deep reforms through," he said.

"Typically we would expect that it's more challenging when you have a coalition government to tackle some of the bigger reforms that the economy may need."

Moody's pegs India's economic growth at 6.6 per cent for fiscal 2025 and 6.2 per cent for the subsequent year. Balancing ambitious infrastructure spend with required debt reduction is a critical factor for the sovereign rating going forward as India manages its fiscal strategy.