India's public debt burden remained within acceptable limits

In its recently released report on Article IV consultations with India, the International Monetary Fund (IMF) said that India's debt-to-gross domestic product (GDP) ratio could rise to 100% by 2028 in the event of an adverse worst-case scenario, such as a widespread resurgence of Covid, a severe global economic downturn, etc., and definitely not what we can reasonably predict in the near future. Yet such headline-grabbing statements have managed to bring the reality of India's national debt into the spotlight. This deserves a deeper look.

In its recently released report on Article IV consultations with India, the International Monetary Fund (IMF) said that India's debt-to-gross domestic product (GDP) ratio could rise to 100% by 2028 in the event of an adverse worst-case scenario, such as a widespread resurgence of Covid, a severe global economic downturn, etc., and definitely not what we can reasonably predict in the near future. Yet such headline-grabbing statements have managed to bring the reality of India's national debt into the spotlight. This deserves a deeper look.

A meaningful understanding of India's position on this parameter would require assessing the extent of the country's public debt, its drivers and its sustainability. To sharpen the focus of this commentary, we limit the scope of our discussion to central government debt only.

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A meaningful understanding of India's position on this parameter would require assessing the extent of the country's public debt, its drivers and its sustainability. To sharpen the focus of this commentary, we limit the scope of our discussion to central government debt only.

Extent: For the financial year 2013-14, the Reserve Bank of India (RBI) data suggests that the Centre's total debt was 58.6 trillion. This increased to 157.4 trillion by 2022-23. This is an addition of 98.9 trillion to the debt stock. But the absolute level of debt alone is not enough to convey anything meaningful. For example, the effects of 5 lakh debt for a person who earns 2 lakh per year will be different than the same burden borne by someone who earns 20 lakh per year. Likewise, debt relative to income or production levels or the debt ratio is a more relevant measure to comment on the extent. RBI data shows that central government debt was about 52.2% of India's GDP at the end of fiscal 2013-14. By the end of 2022/23, this value rose to 61%. Obviously, debt has increased over the last nine years. However, before we go any further, it is important to discuss why this happened.

Drivers: The increase in the country's debt level was mainly driven by two key developments.

First, since 2014, the Narendra Modi government has been investing huge public resources to create state-of-the-art infrastructure and empower all citizens by providing equal access to quality social, physical and digital infrastructure. Between the financial years 2014-15 and 2022-23, the government invested 115 trillion (about $1.5 trillion) in this vision. These are average expenses of 12.8 trillion per year, almost double the average annual spending between 2009-10 and 2013-14 6.85 trillion. The development expenditure budget for 2023-24 (at 22.64 trillion) is almost three times higher for 2013-14. It is clear that the amount of funds allocated and the country's ability to absorb such large-scale investments have increased significantly over the past nine years. Debt was an important source of financing this transformation.

Second: Covid. The pandemic required the Center to do whatever was necessary to protect the lives and livelihoods of all. The government took advantage of this adversity to create a comprehensive welfare and social security framework that provides free grains, vaccines, financial assistance and subsidies to all needy Indians. Besides, the Atmanirbhar Bharat Plan for self-reliance in manufacturing and other sectors of the economy was also launched. These initiatives needed to be funded without diverting resources from other development priorities. Part of the debt was therefore also used for these initiatives. This is evident from the fact that the Centre's debt-to-GDP ratio, which declined steadily from 2013-14 to 2018-19 (from 52.2% to 49.6%), reversed its trend to nearly 62.8 by 2020-21 % increase during Covid times. However, this rate has been declining since 2020/21 and is now around 61%.

Is the national debt sustainable? Since 2014-15, India's economy has grown at an average annual rate of 6%. This pace of growth helped India increase its GDP by about 85%, from $2 trillion to $3.7 trillion. Net tax revenue increased almost 2.5 times 8.15 trillion in 2013-14 20.9 trillion in 2022-23. This growth has been made possible by consistent and extensive public investment. In the medium term, India's economy is expected to continue to grow by over 6%. Banks' non-performing assets (NPA) stock is at a multi-decade low. Companies' balance sheets are deleveraged. Therefore, there are clear signs that private investment is flowing into the economy. It is therefore reasonable to expect the private sector to drive future capital spending, thereby reducing the need for the government to take on debt.

Additionally, the 2022-23 Economic Survey finds that more than 98% of government debt is raised at a fixed interest rate. This means predictable interest payments. India is therefore relatively well protected against interest rate fluctuations. Additionally, 95.2% of government debt is denominated in Indian rupees (i.e. held by resident Indians). Only 4.8% is denominated in foreign currency, meaning the risk of exchange rate volatility is negligible.

A global comparison of post-pandemic debt levels suggests that India's debt is well within acceptable limits. In 2022, India's total debt-to-GDP ratio (with Center and states' liabilities combined) was 81%. In contrast, the rate for France was 112%, Japan 260%, the UK 102%, the US 121%, Singapore 167% and China 77%.

There is evidence that central government debt is not only within acceptable limits, but also highly insulated against external risks and volatility. The country's pace of economic growth also provides the government with ample scope for fiscal consolidation without compromising on its investment priorities.

Post-pandemic, the Center has already significantly reduced its fiscal deficit from 9.2% of GDP in 2020-21 to an expected 5.9% in 2023-24. This should inspire reasonable confidence in the Centre's ability to further reduce its debt in the medium term. However, the Centre's debt could just be a diversionary tactic. Debt levels in some states like Punjab, Himachal Pradesh, West Bengal etc. are reaching worrying proportions. This could be the real challenge. It is time to closely monitor states' financial management.

These are the personal views of the authors.