“RBI Paper Counters IMF Warning, Projects India’s General Government Debt to Fall to 73.4% of GDP by 2030-31”
In the face of the International Monetary Fund’s cautionary statement suggesting that India’s general government debt could surpass 100% of Gross Domestic Product (GDP) in the medium term, a Reserve Bank of India paper presents a contrasting view. The paper, led by deputy governor Michael Debabrata Patra, argues that the debt-to-GDP ratio could actually decline to 73.4% by 2030-31. The authors attribute this potential reduction to proposed spending initiatives on social and physical infrastructure, climate mitigation, digitalization, and labor force skilling.
The authors further assert, “… we reject the IMF’s contention that if historical shocks materialize, India’s general government debt would exceed 100% of GDP in the medium-term and hence further fiscal tightening is needed.” It’s important to note that the views expressed in the article are not attributable to the RBI.
“Furthermore, empirical findings suggest that the benefits of judicious fiscal consolidation and growth complement each other in the medium term, outweighing any short-term costs,” they added.
IMF’s recent forecast indicates that India’s general government debt could potentially exceed 100% of the GDP by FY28 under a worst-case scenario. This projection comes in the wake of a significant surge in India’s general government debt, reaching 88% of GDP in FY21, the highest level recorded in at least four decades. This surge was attributed to increased government spending during the Covid-19 pandemic amidst a decline in revenue. However, the debt ratio has since moderated to around 81% in FY23 as both the Centre and states have embarked on fiscal consolidation efforts, particularly focusing on capital expenditure (capex).
According to a paper by the Reserve Bank of India (RBI), simulations indicate that through recalibration of government spending, the general government debt-to-GDP ratio is projected to decline to 73.4% by 2030-31. This projection is approximately 5 percentage points lower than the IMF’s projected trajectory of 78.2%. Prior to the pandemic in FY20, India’s general government debt stood at 75.2% of GDP.
The projected trajectory of the debt-to-GDP ratio contrasts with that of advanced economies and emerging and middle-income countries. For advanced economies, the ratio is forecasted to rise from 112.1% in 2023 to 116.3% in 2028, while for emerging and middle-income countries, it is projected to increase from 68.3% to 78.1%.
The authors of the paper also redefined capital expenditure to exclude defense spending and include social and economic expenditures related to health, education, skilling, digitalization, and climate risk mitigation, which they termed as developmental expenditure (DE). This is budgeted at Rs 13.9 trillion (4.2% of GDP) in 2024-25 compared to the traditionally defined capex provision of Rs 11.1 trillion (3.4% of GDP).
In the interim budget for 2024-25, the revised estimate of the gross fiscal deficit (GFD) for 2023-24 is set at 5.8% of GDP, slightly lower than the budget estimate (BE) of 5.9%. The government aims to achieve a GFD of 4.5% by 2025-26, with a projected GFD of 5.1% in 2024-25, reflecting a consolidation of 71 basis points over 2023-24 (RE). The budget also maintains a focus on capital expenditure, with its share expected to increase to 3.4% of GDP in 2024-25. This shift towards higher quality expenditure is evidenced by a decrease in the share of the revenue deficit to 38.8% and an increase in the share of capital outlay to 55.7% of the GFD.