IMF Warns India on Debt Concerns, Says It May Exceed 100% of GDP

The IMF said that long-term risks are high because the country needs considerable investment to improve resilience to climate stresses and natural disasters.

New Delhi: The International Monetary Fund (IMF) has warned that India’s general government debt may exceed 100% of gross domestic product (GDP) in the medium term, Business Standard reported, saying that long-term risks are high because the country needs considerable investment to improve resilience to climate stresses and natural disasters.

“This suggests that new and preferably concessional sources of financing are needed, as well as greater private sector investment and carbon pricing or equivalent mechanism,” the IMF said in its annual Article IV consultation report.

The IMF report is part of the Fund’s surveillance function under the Articles of Agreement with member countries.

The Indian government, however, disagreed, saying that sovereign debt risks are limited as it is mainly denominated in domestic currency, the business daily said.

K.V. Subramanian, India’s executive director at the IMF, said the IMF’s assertion that the baseline carries the risk that debt would exceed 100% of GDP in the medium term in the event of shocks which India has experienced historically sounds extreme.

“The same can be said of the staff prognosis that debt sustainability risks are high in the long term. The risks from sovereign debt are very limited as it is predominantly denominated in domestic currency. Despite the multitude of shocks, the global economy has faced in the past two decades, India’s public debt-to-GDP ratio at the general government level has barely increased from 81% in 2005-06 to 84% in 2021-22, and back to 81% in 2022-23,” he said in a statement, which is part of the report.

The IMF also reclassified India’s exchange rate regime to “stabilised arrangement,” but India disputes this, emphasising the importance of exchange rate flexibility.

In its Article IV report, the IMF gave a fairly optimistic outlook for India’s economy, saying it has the potential to grow faster than the fund’s forecast of 6.3% in the current and next fiscal years if the government undertakes key structural reforms, Bloomberg reported.

In an accompanying statement to its report, IMF said that India needs “ambitious” fiscal consolidation over the medium term in order to curb its public debt.

“A sharp global growth slowdown in the near term would affect India through trade and financial channels. Further global supply disruptions could cause recurrent commodity price volatility, increasing fiscal pressures for India. Domestically, weather shocks could reignite inflationary pressures and prompt further food export restrictions. On the upside, stronger than expected consumer demand and private investment would raise growth,” it said.

Steps to bring down public debt

In October 2023, finance minister Nirmala Sitharaman had said that the government is looking at ways to bring down government debt and is monitoring the debt reduction measures taken by emerging market economies.

The central government’s debt stood at Rs 155.6 trillion, or 57.1% of GDP, at the end of March 2023. During the same period, the debt of state governments stood at about 28% of GDP, Mint reported.

India faces challenges in enhancing its credit ratings due to elevated debt levels and the substantial cost associated with servicing that debt.

Despite being called ‘bright spot’ in the global economy, the Indian economy seems to be just carrying on in terms of sovereign investment ratings.

In June 2023, the Economic Times had written about why all three global rating agencies, namely Fitch, S&P and Moody’s, have the lowest investment-grade rating on India.

Agencies believe that India’s stronger fundamentals are undermined by the government’s weak fiscal performance and burdensome debt stock, as well as the economy’s low GDP per capita, the business daily said.

India’s per capita income in nominal terms doubled to Rs 1,72,000 since 2014-15 when the Narendra Modi-led NDA came to power. That said, uneven income distribution remains a challenge, exacerbated by the Covid-19 pandemic which gave rise to the ‘K-shaped’ growth phenomenon.

According to experts, India’s low per capita income is a major factor that pulls down India’s score in the sovereign rating.

However, others say that the rating agencies should take into account that the quality of government expenditure has been improving. This will help in improving economic growth, through a stronger multiplier effect.