The Reserve Bank of India’s economic researchers have rejected the International Monetary Fund’s contention that if historical shocks materialise, India’s general government debt would exceed 100 per cent of GDP in the medium term and hence require further fiscal tightening.

“Our simulations reveal that the general government debt-GDP ratio swerves below the projected path set out by the IMF in its latest Article IV consultation report for India,” said a team of RBI’s economic researchers, including Deputy Governor MD Patra, in an article “The Shape of Growth Compatible Fiscal Consolidation” in RBI’s latest monthly bulletin.

They emphasised that with recalibration of government expenditure, the general government debt-GDP ratio is projected to decline to 73.4 per cent by 2030-31, around 5 percentage points lower than the IMF’s projected trajectory of 78.2 per cent.

“This is noteworthy as the debt-GDP ratio is projected to rise from 112.1 per cent in 2023 to 116.3 per cent in 2028 for advanced economies and from 68.3 per cent to 78.1 per cent for emerging and middle-income countries,” the RBI officials said.

RBI officials’ baseline projection suggests that India’s debt-GDP ratio will chart a secular decline, reaching 77.4 per cent in 2030-31. In the baseline,real GDP growth is projected at 7.3 per cent per annum during the forecast period. CPI inflation is projected at 4.3 per cent per annum and remains stable at that level for the alternative scenarios.

Four scenarios

In scenario 1, the debt-GDP ratio rises in the short-run, capturing the short-run tradeoff, but falls thereafter to 75.3 per cent by 2030-31.

Scenario 2 is similar to Scenario 1 in that the choice of energy-efficient transition is subject to short-run pain but it yields long-run gains by reducing the debt-GDP ratio to 76.2 per cent by 2030-31.

In Scenario 3, digitalisation impacts the fiscal consolidation path through higher levels of productivity, taking the debt-GDP ratio at 75.9 per cent at the end of the forecast period.

Scenario 4 combines all the measures and shows that the debt-GDP ratio declines to 73.4 per cent by 2030-31

IMF’s take

The IMF’s December 2023 Country Report observed that, given the shocks that India has experienced historically and instances of fiscal slippages between 2000 and 2020, the baseline carries the risk that, should similar shocks materialize, debt would exceed 100 percent of GDP in the medium term.

“Reaching the authorities’ deficit target (of below 4.5 per cent of GDP) in FY26 and then maintaining further fiscal tightening would rebuild buffers at a faster pace, safeguarding against shocks.

“This would also reduce the interest burden on the budget (currently at around one third of tax revenue), creating room for expenditure which supports long-term growth, such as on infrastructure, health, and climate change mitigation and adaptation,” per the IMF report.

comment COMMENT NOW