Editorial of the Day (4th Jan): The Dispute on India’s Debt Burden

Context: India’s economic landscape has recently come under scrutiny following two noteworthy observations by the International Monetary Fund (IMF).

IMF Perspectives on India’s Economic Management and Debt Challenges

• Exchange Rate Classification: The IMF has reclassified India’s exchange rate from ‘floating’ to ‘stabilised arrangement’, indicating a managed currency potentially influenced by RBI interventions.
• Debt Sustainability: Concerns about India’s long-term debt sustainability, with projections of general government debt potentially reaching 100% of GDP by 2028. This projection is based on significant investments needed for climate change mitigation and resilience against natural disasters.

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Broader Context of Worrying Global Debt Scenario

• Need for New Financing Methods: The IMF emphasises the necessity for new and, preferably, concessional financing sources. This is essential to fund climate change mitigation efforts, suggesting a significant role for private sector investment and carbon pricing mechanisms.
• Role of Government Borrowings: While government borrowings are pivotal in accelerating development, the burden of debt can hinder progress by limiting financing access, increasing borrowing costs, and causing currency devaluation and slow growth.
• UN’s Observation on Debt Servicing: The United Nations notes that countries are often forced to choose between servicing their debt and investing in crucial sectors like education and health.
  • In 2022, 3.3 billion people lived in countries where more is spent on interest payments than on education or health.
• Global Public Debt Trends: Since 2000, global public debt has increased more than fourfold, whereas global GDP has only tripled.
  • In 2022, global public debt hit a record USD 92 trillion, with developing countries accounting for nearly 30% of this, led by China, India, and Brazil.
• Higher Debt Growth in Developing Countries: Over the last decade, public debt in developing countries has risen faster than in developed countries.
  • This increase is attributed to the need for development financing, the cost-of-living crisis, and climate change impacts.
• Asymmetric Burden of Debt: Developing countries face higher interest rates on debt than developed countries, affecting their debt sustainability.
  • The number of countries where interest spending exceeds 10% of public revenues rose from 29 in 2010 to 55 in 2020.
• Contextualizing IMF’s Projections for India: The IMF’s concerning projections for India must be viewed within this global context, where developing nations are increasingly burdened by debt challenges.

Challenges for India’s Debt Burden

• Public Debt Management: As of March 2023, the Union government’s debt stood at ₹155.6 trillion, equivalent to 57.1% of GDP, while state governments’ debt was about 28% of GDP.
  • These figures exceed the targets set by the Fiscal Responsibility and Budget Management Act (FRBMA) of 2005, which aimed for debt-to-GDP ratios of 40% for the Centre, 20% for States, and a combined 60%.
• Credit Ratings: Despite being the fastest-growing major economy, India’s sovereign investment ratings have not improved.
  • Both Fitch Ratings and S&P Global Ratings have maintained India’s credit rating at ‘BBB- with a stable outlook’ since August 2006.
  • This is the lowest investment-grade rating. Factors influencing this include the government’s fiscal performance, high debt levels, and India’s low per capita income.
• Fiscal Performance Issues: There are concerns about fiscal slippage in the fiscal year 2024.
  • India Ratings and Research (IR&R) notes higher expenditures than budgeted on employment guarantee schemes and subsidies.
    • For instance, the budgeted fertilizer subsidy of ₹44,000 crore was almost exhausted by October 2023, leading to an increase to ₹57,360 crore.
    • Similarly, spending on the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) exceeded the budgeted amount, with additional funds being allocated.
  • Challenges of an Election Year: The increase in subsidies and spending on employment schemes is not surprising in the context of the upcoming general elections.
    • However, these fiscal decisions have implications for India’s economic stability and debt management.
    • Sticking to a fiscal correction path in an election year is challenging but crucial to avoid worst-case scenarios.

Way Forward

• Achieving Balance: The International Monetary Fund (IMF) highlights the need for India to strike a crucial balance, which involves maintaining a stable exchange rate and ensuring the sustainability of its long-term debt.
• Innovative Financing: Emphasises the importance of identifying new and preferably concessional financing sources. This approach is crucial for managing fiscal responsibilities more effectively.
• Boosting Private Sector Investment: Stresses the need for an increase in investments from the private sector, which is vital for fostering economic growth and stability.
• Implementing Carbon Pricing: Suggests the adoption of carbon pricing or similar mechanisms. This is aimed at addressing long-term environmental risks and promoting sustainable economic practices.
• Prudent Fiscal Management: Reflects a broader call for cautious and prudent fiscal policy management. This is particularly important in light of potential concerns regarding excessive management of exchange rates.

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