Tighten fiscal belt and lower debt
In a welcome relief, the central government’s FY22 debt settled at 56.29% of GDP against the projected 59.9%. A higher-than-projected national output led to the reduction, which was also visible in the FY22 fiscal deficit that printed at 6.7% of GDP compared to the projected 6.9%. Led by the pandemic-induced expenditure, the general government (centre and states) debt-to-GDP shot up to an alarming 90% in FY21.
It fell to 85.2% in FY22 alright, but an unusual increase in tax collections caused the reduction and not because a part of the previous debt was retired. The ratio will likely remain high in the current fiscal, which could spook rating agencies, who remain ever-ready to junk India’s sovereign rating. This is why an expert committee on fiscal management recommended the ratio be brought to acceptable levels soon, while the 15th Finance Commission suggested lowering it to 85.7% of GDP in FY26.
But the RBI’s latest Financial Stability Report flagged the issue of the rising consolidated debt-to-GDP ratio. They warned that it could remain elevated, partly due to high government borrowings. In fact, the central bank had earlier projected that after moderating to 85.2% in FY22, the general government debt ratio could likely worsen to 89.1% by FY27 if economic growth stagnates at 5% from FY24 onwards.
The government announced a record-high gross borrowing programme of Rs 14.95 lakh crore this fiscal, pegging deficit at 6.4% of GDP, but concerns are being raised given the rising expenditure.
For instance, fertiliser subsidy alone may more than double to Rs 2.5 lakh crore, even as the recent excise and import duty cuts translate to nearly Rs 1 lakh crore in foregone revenue. While the recovery in growth rate and elevated inflation (which jacks up nominal GDP) may reduce the headline debt-to-GDP ratio, the centre and states must lower the combined debt to avoid its destabilising effects. The differential interest and growth rates of advanced economies have been favourable so far, but tightening monetary policies worldwide erodes this advantage. India needs a credible debt management strategy.