According to the IMF’s most recent annual consultation report, India’s economic growth is expected to be balanced. The assessment commended India’s efficient inflation management, but it also voiced concerns about India’s debt’s long-term sustainability. The research emphasizes the importance of a long-term approach to debt management.

What are the Key Observations of the IMF Report?

• Concerns about India’s long-term debt sustainability: Under unfavorable conditions, India’s government debt could reach 100% of GDP by 2028.
• The IMF reclassified India’s exchange rate regime, labeling it as a “stabilised arrangement” rather than “floating,” reflecting a shift in understanding of how India regulates its currency. The government fixes the currency rate in a stabilized arrangement, whereas the demand and supply factors in the foreign exchange market decide it in a floating exchange rate system.
• Long-Term Debt Management Risks Are High: Long-term debt management risks are high since significant investment is necessary to meet India’s climate change mitigation commitments.

What is Public Debt?

About

The total amount of money owed by a government to external creditors and domestic lenders is referred to as public debt.
In India, public debt includes all Union government commitments that must be settled using monies from the Consolidated Fund of India.

Main Types

• External Debt: The amount of a nation’s debt that is owed to foreign creditors, such as foreign governments, international organizations, and commercial companies operating outside of the nation, is known as its external debt.

• Internal Debt: Debt due to lenders within the nation, such as individuals, banks, and other domestic establishments, is referred to as internal debt. Internal debt is further categorised into marketable and non-marketable securities.

Objectives

• Government Expenditure Financing: One key goal is to offer a consistent and reliable source of funding for government expenditures, particularly during times of budget deficits.
• Stabilizing the Economy: During economic downturns, public debt can be strategically employed as a counter-cyclical policy to stabilize the economy, and increased government spending through borrowing can encourage economic activity.
• Managing Liquidity: Governments can use public debt to manage liquidity in the financial system, allowing them to control the money supply and interest rates.
• To Fund Development Plans: Public debt can be used to fund key infrastructure projects such as the construction of roads, bridges, and public utilities, promoting economic development and advancing education, health care, and other critical areas.

Measuring Mechanisms

• The debt-to-GDP ratio is stated as a proportion of the country’s Gross Domestic Product (GDP). A higher ratio suggests that the debt burden is greater in relation to the size of the economy.

What are India’s Primary Concerns Regarding Public Debt Management?

India’s Public Debt Is Increasing:

• At the end of March 2023, the Union government’s debt was 155.6 trillion, or 57.1% of GDP, with state governments contributing around 28% of GDP to the entire debt burden.
• The public debt-to-GDP ratio in India climbed marginally from 81% in 2005-06 to 84% in 2021-22, then back to 81% in 2022-23.

High-Interest Payments:

• Interest payments in India exceed government spending on critical areas such as education and healthcare, accounting to more than 5% of GDP and 25% of revenue revenues on average.

Limitations on Fiscal Policy:

• In times of economic depression, high amounts of public debt may limit the government’s ability to undertake counter-cyclical fiscal policies.
• This limitation may hinder the government’s ability to respond to shocks and economic issues.

Lower Credit Ratings:

• Consistently large deficits and debt levels may result in poorer sovereign ratings by rating agencies, raising the cost of external commercial borrowing and making it more difficult for the government to raise cash from foreign markets.

Mismanagement of Public Funds and Burden on Future Citizens:

• A considerable percentage is allocated to government offices where corruption, bribery, and bureaucratic obstacles abound, resulting in the mismanagement of public funds.
• Excessive debt accumulation may raise worries about intergenerational equity, since future citizens may be burdened with repaying both the principal and interest accrued during the period of financial irresponsibility. Capital injections into state-owned banks via recapitalisation bonds have ramifications for intergenerational obligations.

Crowding Out Private Investment

• Large government borrowings have the potential to crowd out private investment by absorbing available funds in the financial system, so affecting economic growth.
• When private investment is pushed out, businesses may experience difficulties expanding operations, adopting new technology, or increasing productivity, thus affecting the economy’s overall competitiveness.

Financial System Risks

• A significant concentration of debt in the financial system can pose systemic hazards, triggering a chain reaction that threatens the financial system’s overall stability.

Way Forward?

Prudential Stance

• Achieve Fiscal Consolidation: The NK Singh Committee on FRBM proposed a debt-to-GDP ratio of 40% for the central government and 20% for states, for a total debt-to-GDP ratio of 60% for the general government.
• Fiscal Reforms at the State Level: The federal government may encourage states to adopt sensible fiscal policies and discourage excessive borrowing by rewarding or incentivizing governments that practice fiscal discipline.

Raise Additional Revenue:

• Improve Tax Collection and Compliance: Increase government revenue by improving tax administration and compliance. Cross-matching technology for GST and income-tax returns can improve tax collection efficiency and reduce tax evasion.
• Administrative Streamlining: Increase income by streamlining administrative processes and implementing and administering new taxes more effectively.
• Efficient Asset Management and Disinvestment: Pursue disinvestment and strategic asset management to optimize government resources and eliminate the need for excessive borrowing.

Re-orient Spending in Infrastructure and Capacity Building

• Infrastructure Investments: Increase economic productivity and support sustainable growth by prioritizing investments in physical infrastructure, human capital, and green initiatives.
• Privatisation of Loss-making PSUs: As with Air India, the government may consider privatising loss-making public sector undertakings (PSUs).
• PPP Model in Social Schemes: The government may consider a PPP model in social schemes such as the Deen Dayal Upadhyay Grameen Kaushalya Yojna (DDU-GKY). This could help to reduce the national debt.
• Introduce Green Debt Swaps: A green debt swap is a negotiation between a debtor country and its creditors to exchange or restructure existing debt in a way that coincides with environmentally friendly and sustainable projects. It allows low-income countries to redeploy a portion of their loan repayments to invest in initiatives to combat climate change, environmental protection, health, and education. Debt swaps, with the permission of creditors, can assist low-income countries around the world in avoiding default.

Utilise Institutional Mechanisms

• Using the Public Financial Management System (PFMS) to its Full Potential: Using the PFMS to its full potential is critical to effective fiscal deficit management, as it ensures increased openness and accountability in government expenditures.
• Establishment of the Public Debt Management Agency (PDMA): The establishment of the PDMA will centralize expertise and responsibilities linked to public debt management, ensuring a focused and specialized approach.
• This can lead to more effective decision-making and strategic planning in dealing with the intricacies of the country’s public debt.

Conclusion

While the Finance Ministry dismisses IMF estimates as a “worst-case scenario” and not a done deal, India should strive to create a financial climate marked by prudence, transparency, and long-term fiscal standards.