THE DISPUTE ON INDIA’S DEBT BURDEN
THE CONTEXT: The International Monetary Fund recently in its report raised concerns about India’s sovereign debt, i.e. the total debt burden on the Union plus State governments. It has sparked critical reactions from the Indian Government.
IMF RECENT REPORT:
- IMF’s annual Article IV consultation report, which is part of the Fund’s surveillance function under the Articles of Agreement with member countries has been released. It made two observations:
1. It has raised concerns about the long-term sustainability of India’s debts.
2. It reclassified India’s exchange rate regime and termed it as a “stabilised arrangement” instead of “floating”.
- The report also acknowledged India’s effective inflation management and projected a balanced outlook for India’s economic growth.
- The IMF states that India’s general government debt, including the Centre and States, could be 100% of GDP under adverse circumstances by fiscal 2028.
- It stated “long-term risks are high because considerable investment is required to reach India’s climate change mitigation targets and improve resilience to climate stresses and natural disasters.
GLOBAL TRENDS OF DEBT:
- The United Nations, notes that the countries are forced to make the difficult decision between providing for their citizens and paying off their debt. It states, in 2022, 3.3 billion people live in countries that spend more on interest payments than on education or health.
- Global public debt: Global public debt has increased more than fourfold since 2000, outpacing global GDP, which tripled over the same period. In 2022, global public debt reached a record USD 92 trillion.
- Rise of debt in developing countries: Public debt has increased faster in developing countries compared to developed countries over the last decade. Developing countries accounted for almost 30% of the total, of which roughly 70% is attributable to China, India and Brazil. The number of countries facing high levels of debt increased from 22 in 2011 to 59 in 2022. The rise of debt in developing countries is due to growing development financing needs intensified by the COVID-19 pandemic, the cost-of-living crisis, and climate change.
- Asymmetric debt: The burden of debt is asymmetric between developed and developing countries as the latter even without considering the costs of exchange rate fluctuations have to pay higher interest rates than the former. For example, the countries in Africa borrow on average at rates that are four times higher than those of the United States and even eight times higher than those of Germany. This higher borrowing costs undermines debt sustainability of developing countries. The number of countries where interest spending represents 10% or more of public revenues increased from 29 in 2010 to 55 in 2020.
THE CHALLENGE FOR INDIA:
1. Credit ratings
- S&P Global Ratings states that Credit ratings are forward-looking opinions about the ability of debt issuers, like corporations or governments to meet their financial obligations on time.
- They provide transparent global language for investors and other market participants and is one of the inputs which is considered as part of their decision-making processes.
- Elevated debt levels and substantial costs associated with servicing debt impact credit rating.
- Even being the fastest growing economy, India faces the challenge of enhancing its credit ratings. Sovereign investment ratings for India have remained the same for a long time.
- Both Fitch Ratings and S&P Global Ratings have kept India’s credit rating unchanged at ‘BBB- with stable outlook’. It should be noted that BBB- is the lowest investment grade rating and India has been on that scale since August 2006.
- India’s credit ratings are undermined by the
1. government’s weak fiscal performance
2. burdensome debt stock
3. India’s low per capita income
2. Managing public debt:
- India is facing challenge of managing public debt to ensure that it does not breach sustainable levels.
- The weight of debt can act as a drag on development due to limited access to financing, rising borrowing costs, currency devaluations and sluggish growth.
a). Breach of FRBM target:
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- The 2018 amendment to the Union government’s FRBM Act specified debt-GDP targets for the Centre, States and their combined accounts at 40%, 20% and 60%, respectively.
- The central government’s debt was ₹155.6 trillion, or 57.1% of GDP, at the end of March 2023 and the debt of State governments was about 28% of GDP.
- Finance Ministry stated that India’s public debt-to-GDP ratio has increased from 81% in 2005-06 to 84% in 2021-22 and is back to 81% in 2022-23. This is way higher than the levels specified by the FRBM Act.
- These high levels of debt-GDP ratio can be attributed to the disruptions due to the pandemic, which resulted in a major deterioration in the debt-GDP ratios.
b). Fiscal slippage:
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- There are worrying signs on the fiscal fronts as well. Despite growth in tax collections, there is the possibility of a fiscal slippage in FY24, according to a report by India Ratings and Research (IR&R).
- IR&R attributes this to higher expenditure on employment guarantee schemes and subsidies.
- For example, Budgeted fertilizer subsidy of ₹44,000 crore was almost over by end-October 2023 and the Union government has now increased fertilizer subsidy to ₹57,360 crore.
- Similarly, due to sustained demand for employment under MGNREGA, a sum of ₹79,770 crore has already been spent till December 19, 2023, as against the budgeted ₹60,000 crore and an additional sum of ₹14,520 crore has been allocated through the first supplementary demand for grants.
THE WAY FORWARD:
- Need of fiscal corrections: There is a need for fiscal correction particularly in this election year to avoid worst-case scenarios.
- Debt sustainability: To manage and achieve the debt sustainability, there is a need for more prudent management of debt in the medium term. It can be done by narrowing the gap between expenditure and tax revenues as well as increasing the efficacy of our expenditures and increasing revenues.
- Human capital: India needs to spend considerably more on public funds for enhancing human capital, i.e. on primary healthcare and primary education. Also, there is a need to fund research and innovation via public universities. This suggests that new and preferably concessional sources of financing are needed including greater private sector investment in this scenario.
- Government borrowing: The government borrowings can play a vital role in accelerating development, as governments can use it to finance their expenditures and invest in people to pave the way for a better future.
THE CONCLUSION:
There is increasing concerns regarding the rise of global debt as it has potential implications for economic stability and the capacity of financial systems. Thus, there is a need to strike the right balance between debt accumulation and economic growth.
PREVIOUS YEAR QUESTIONS
Q.1 Do you agree that the Indian economy has recently experienced V-shaped recovery? Give reasons in support of your answer. (2021)
Q.2 The public expenditure management is a challenge to the Government of India in the context of budget-making during the post-liberalization period. Clarify it. (2019)
MAINS PRACTICE QUESTION
Q.1 Rising global debt levels often raise concerns about debt sustainability, especially in the case of government debt driven by reckless borrowing for populist programs. Discuss with specific reference to the Indian scenario.