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Informist, Monday, Sep 23, 2024

 

NEW DELHI – India's fiscal strength may weaken materially if the government completely shoulders the investment burden needed to close the gap on climate investment, Moody's Ratings said in a report today. Instead, it should involve the private sector to mitigate the impact on the sovereign balance sheet.

 

"Among emerging markets, debt would rise materially in South Africa, Brazil and India; these governments' fiscal buffers are also more constrained given their very high debt burdens," the ratings agency said.

 

The report said climate investment globally is well short of achieving zero net emissions by 2050 and dealing with the impact of climate change. India was among the most vulnerable to bridging the investment gap, and will have to spend an additional 3.4% of its GDP on bridging this gap by 2030, the second-most among large economies that are also significant greenhouse gas emitters. The impact on economies such as the US and China will be limited, slightly lower than the global average of 1.8% increase in spending, it said.

 

The report further said that if the climate investment gap is bridged by a public-private financing mix in the same period, the burden of additional spending would be much lower, to the tune of 1.3% of India's GDP. However, it added that emerging market economies are less likely to be able to share climate investment costs with the private sector than advanced economy peers. 

 

The report further mentioned that the size of green bond issuance in emerging markets is also typically smaller than in advanced economies. While India has joined the bandwagon to fund green projects by raising funds via green securities, the response so far has been lacklustre. 

 

The government has raised 376.97 bln rupees through green securities since their launch in 2022-23 (Apr-Mar) to finance environment-friendly projects. Besides the maiden issuance, which received a greenium of 6 basis points, subsequent auctions of 5- and 10-year sovereign green bonds have only achieved 1-5 bps of greenium, thereby reflecting the lukewarm response from investors.

 

"The ultimate proportion of public and private sector investment will be shaped by factors including new financing options, as well as changes in government priorities and capacity," Moody's said.

 

This analysis comes as India stands at a crucial juncture. On the one hand, climate-related investments are assuming huge relevance in government budgets, while on the other, there's a policy move to cut the government's debt burden progressively. 

 

According to the report, if the government entirely shoulders the burden to bridge the gap on climate financing, India's interest burden as a percentage of revenue, will increase by 5 percentage points to 29% by 2030. 

 

This is detrimental as rating agencies have maintained that a rating upgrade for India hinges on its ability to cut back on its debt burden and more importantly, its interest payments as a percentage of revenues. "Government debt burdens in India, Mexico and Indonesia would also rise materially, by 7-9 percentage points," it said.

 

In the Budget for 2024-25, Finance Minister Nirmala Sitharaman had said that from 2026–27 onwards, the Centre will endeavour to "keep the fiscal deficit each year such that the central government debt will be on a declining path as a percentage of GDP." This policy shift towards lowering the Centre's debt-to-GDP ratio was aligned with the intention to cut interest expenses, and a rise in climate financing will undo this effort.

 

The policy shift also indicated a departure from targeting a particular fiscal deficit level for each financial year. At the 4.9% fiscal deficit target for the current year, the Centre's debt is 56.8% of GDP, according to Budget documents.

 

Interest payments are projected to grow 9.3%, while nominal GDP growth is seen at 10.5% in the current fisca. For the central and state governments combined, the interest payments to revenue ratio is around 25% currently, which means 25% of revenue is dedicated to debt servicing.

 

The government has been pitching that India, which is currently rated at the lowest rung of investment grade at Baa3 by Moody's, deserves a much higher rating because of its economic resilience and stable fundamentals.

 

"Unless they achieve significant growth benefits from climate investment, are able to restrain spending in other areas without crimping growth, or generate higher government revenue through climate policies, the additional debt and interest payments could undermine their fiscal metrics and erode their credit strength," Moody's said in its report.  End

 

Reported by Aaryan Khanna and Priyasmita Dutta

Edited by Tanima Banerjee

 

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