Context:
The International Monetary Fund (IMF) in its latest Article IV Consultation with India has warned that government debt could hit 100% of GDP by 2027-28 under adverse circumstances.
Highlights of IMF’s Article IV consultations with India:
- It has raised concerns about the long-term sustainability of India’s debts.
- It has stated that India’s general government debt, including the Centre and States, could hit 100% of GDP under adverse circumstances by 2027-28.
- It highlighted that while the budget deficit has eased, the general government debt remains elevated and fiscal buffers need to be rebuilt.
- In this regard, the IMF’s Executive Board has recommended “ambitious medium-term consolidation efforts” given the elevated public debt levels and contingent liability risks.
About IMF’s Article IV Consultation
- The IMF, under Article IV of its Articles of Agreement, holds bilateral discussions with members, usually every year.
- A staff team visits the country, collects economic and financial information, and discusses the country’s economic developments and policies with top officials.
Govt’s Response:
- The Government highlighted that the Report talks only of a worst-case scenario and is not fait accompli.
- It pointed out that among the various favourable and unfavourable scenarios given by the IMF, under one extreme possibility, like once-in-a-century COVID-19, there is a possibility that the General Government’s debt could be ‘100% of debt-to-GDP ratio’ under adverse shocks by 2027-28.
While sharing a cross-country comparison on debt levels, the Govt. asserted that “India has done relatively well” and the debt level dipped “steeply” from about 88% in 2020-21 to about 81% in 2022-23 which is still below the debt level of 2002.
- It pointed to the corresponding figures of ‘worst-case’ scenarios for the U.S., U.K. and China are about 160%, 140%, and 200%, respectively, which is far worse compared to 100% for India.
- The Govt. stressed that the shocks experienced this century by India (viz. the global financial crisis, Taper Tantrum, COVID-19, Russia-Ukraine War, etc.) were global and uniformly affected the entire world economy.
About General Govt. Debt
- The general govt debt is the total gross debt outstanding at the end of the year or quarter and consolidated between and within the government subsectors. It includes the debt of both the Centre and the States.
- The combined debt of Central and State governments stood at 81% of GDP in 2022-23, from 88% in 2020-21 which is way higher than the levels specified by the Fiscal Responsibility and Budget Management (FRBM) Act.
FRBM Act, 2003: It sets targets for the government to reduce fiscal deficits, revenue deficits and public debt, to bring greater transparency in fiscal operations of the government.
In 2016, the FRBM Review Committee headed by N K Singh recommended significant changes to the Act:
- It recommended a debt-to-GDP ratio of 60% for the general (combined) government by 2023, comprising 40% for the Central Government and 20% for the State Governments.
- It also provided for an “Escape Clause” under which the central government can flexibly follow fiscal deficit targets during special circumstances.
- In 2020, with the advent of the COVID-19 pandemic, the government used the escape clause to allow the relaxation of the target, thus further pushing the fiscal targets.
Factors behind an increase in public debt
Increase in subsidy bills: Subsidies provided by the government, such as those for food, fuel, and fertilizer, can strain fiscal targets if not managed effectively.
- The Govt. has recently extended the Prime Minister Garib Kalyan Yojana (PMGKAY) to provide food grains free of cost to over 80 crore Indians. This extension will cost the exchequer ₹ 11.8 lakh crore.
- The budgetary fertilizer subsidy of ₹ 44,000 crore was almost over by end-October 2023 and the Union government has now increased the fertilizer subsidy to ₹ 57,360 crore.
- Additional fund for MGNREGA: A sum of ₹ 79,770 crore has already been spent till December 19, 2023, as against the budgetary outlay of ₹ 60,000 crore and an additional sum of ₹ 14,520 crore has been allocated through the first supplementary demand for grants.
- Freebies by state governments: During election years, free electricity, waiver of agricultural loans, free public transport, implementation of Old Pension Scheme, etc. have impacted the fiscal position of States.
- Covid-19 disruption: It resulted in lower tax collections thus constraining the government’s ability to finance its expenditure without resorting to borrowing.
- Vicious cycle of Interest payments: As debt accumulates, interest payments can consume a significant portion of the government’s budget, leaving less room for other expenditures and potentially leading to further borrowing.
Govt. Measures to check the rising debt level
- Fiscal Consolidation: Despite a once-in-a-lifetime pandemic and other global headwinds, the Govt. has emphasized fiscal consolidation to reduce fiscal deficits and contain the growth of public debt.
- Revenue Enhancement Measures: The government has implemented measures to enhance revenue generation and broaden the tax base. This includes introducing tax reforms like GST, streamlining tax administration, combating tax evasion and avoidance, and promoting compliance to augment revenue mobilization efforts.
- Increase in Capex: In last year’s budget, the Govt. had announced a record increase in capital expenditure to ₹ 10 lakh crore for FY24, up by 37.4% from ₹ 7.28 lakh crore in FY23.
Public Asset Management: India has focused on leveraging public assets and divesting non-core assets to unlock value, raise additional resources, and reduce the fiscal burden.
- The Govt. has launched the National Monetization Pipeline (NMP) with a target of ₹ 6 lakh crores by monetizing the core assets of the central government.
Way Forward
- Though the IMF’s debt projections could be viewed as worst-case scenarios of the medium term, the short-term challenge of sticking to the fiscal correction path in an election year might go a long way towards avoiding worst-case scenarios.
- Thus, bringing greater private sector investment, and reducing high levels of debt to stay the course on its commitment to bring the deficit to 4.5% of GDP by 2025-26 from an estimated 5.9% this year, is critical for India to maintain fiscal sustainability.