Money & Banking

Higher borrowing to push up gross debt to 87.6% of GDP: SBI’s Ecowrap

Our Bureau Mumbai | Updated on July 20, 2020

‘Growth rather than continued fiscal conservatism, is the only mantra to get India back on track’

Higher level of borrowing this fiscal is likely to increase India’s gross debt to around ₹170-lakh crore or 87.6 per cent of gross domestic product (GDP) in FY21, up from ₹146.9-lakh crore (72.2 per cent of GDP) in FY20, according to State Bank of India’s research report ‘Ecowrap’.

Interestingly, the GDP collapse is pushing up the debt-to-GDP ratio by at least 4 per cent, implying that growth rather than continued fiscal conservatism, is the only mantra to get India back on track, the report said.

The report warned that the higher debt amount will also lead to shifting of the Fiscal Responsibility and Budget Management (FRBM) target of combined debt (of Centre and states) to 60 per cent of GDP by FY23 by seven years; the target is now expected to be achievable only in FY30.

“Fiscal estimates have gone awry across the globe amidst higher pandemic-related expenditures. Together with declining GDP growth, debt-to-GDP ratio has also been adversely affected in all countries.

“.…We again reiterate that the current thinking of rating downgrade in policy circles is a false negative as India’s rating is likely to face a litmus test of downgrade in FY21, depending on what we have done to bring growth back to track,” Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI, said.

Within the projected increase in gross debt, SBI’s economic research department assessed that external debt is estimated to increase to ₹6.8-lakh crore (3.5 per cent of GDP). Of the remaining domestic debt, the component of States’ debt is expected at 27 per cent of GDP.

Sustainability of Indian debt

The report observed that the current level of foreign exchange reserves are sufficient to meet any external debt obligations. On the internal debt, since most of the debt is domestically owned, the debt servicing of the same is not an issue.

“In the current situation, our nominal GDP growth is likely to contract significantly and based on this, our interest growth differential will turn positive in FY21, thus raising serious questions on debt sustainability,” Ghosh said.

Falling yields and monetisation

The weighted average cut-off yield for States has so far reduced significantly to 6.49 per cent, compared to 7.23 per cent in FY20. For the Centre, the rate has come down to 4.53 per cent in FY21 from 6.85 per cent in FY20. This, in turn, might help in significantly reducing interest costs, the report said.

In this regard, Ghosh observed that “The issue of declining interest costs brings to the fore the strategy to fund the huge increase in government deficit.

“We strongly emphasise that direct monetisation is both a mathematical and a preferred policy option that could facilitate borrowing at a lower cost and anchor inflationary expectations, at least for now, as it will be liquidity substitution in lieu of deficient government revenue.”

Ghosh believes that in the Indian context, if monetisation of government deficit is properly executed through options like ‘Covid Perpetual Bonds’, the government can take advantage of issuing longer-term papers at lower rates now, as rates will come down further.

Otherwise empirical research shows there is no material advantage in locking in long-term funding, he added.

Published on July 20, 2020

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