Debt red-flag by IMF: No immediate risk, but maintain vigil
The International Monetary Fund (IMF) raising a red flag on India’s elevated debt levels is a cause for concern. However, given the government’s recent performance on fiscal health, it would be wrong to push the panic button just yet. IMF’s own data shows that the level of India’s government debt has improved from 88 percent of the GDP in 2020-21 (Covid year) to 81 percent in 2022-23. The multilateral financial agency has projected levels of around 82 percent for the current and next financial years. India is so far on track to post a 5.7 percent fiscal deficit this year, down from 6.4 percent last year. The tax buoyancy—with gross collections up 14 percent till October—gives confidence that the government is likely to stay on its fiscal glide path as far as the current financial year is concerned.
The main point of discussion in the IMF report is its assertion that given the long-term risks and climate change challenges, the current fiscal plans of the government “does not rebuild buffers at a sufficient pace and debt could potentially reach over 100 percent of GDP in the medium term”. The report also says that if India follows a certain reform path highlighted by the IMF staff, the debt level would remain below 100 percent of GDP for the next five years. The IMF’s main concern about India’s debt sustainability is the funding required for attaining climate change goals. The agency estimates that India would need to invest 4-8 percent of its GDP per year to reach its net zero emission goals by 2070. Also, given India’s current mix of funding sources, the country’s debt-to-GDP ratio could go as high as 130 percent of GDP.
Given the long-term nature of climate change goals and uncertainties around the path taken to reach those goals, such extreme predictions can always be seen with suspicion. However, the government cannot be complacent with its recent performance on the fiscal front. Given India’s federal structure, the central government needs to ensure that states follow prudent fiscal policies of their own to avoid a mess in the future. In the short term, the government can take solace that bond yields have started coming down across the globe, and that should ease the interest burden on the government.