RBI economic researchers reject the IMF's claim that India's debt would exceed 100% of GDP if historic shocks occurred

Economic researchers at the Reserve Bank of India have rejected the International Monetary Fund's claim that India's public debt would exceed 100 per cent of GDP in the medium term in the event of historical shocks and would therefore require further fiscal tightening.

“Our simulations show that the general government debt ratio is deviating below the forecast path set by the IMF in its latest Article IV consultation report for India,” a team of economic researchers at the RBI, including deputy governor MD Patra, said in an article “The shape of growth-compatible fiscal consolidation” in the RBI’s latest monthly report.

They highlighted that with the recalibration of government spending, the general government debt ratio is expected to fall to 73.4 percent by 2030/31, about 5 percentage points below the IMF's forecast target of 78.2 percent.

“This is notable as the debt-to-GDP ratio is expected to increase from 112.1 percent in 2023 to 116.3 percent in 2028 for advanced economies and from 68.3 percent to 78.1 percent for emerging and middle-income countries,” the RBI officials said.

The RBI officials' baseline forecast suggests that India's debt-to-GDP ratio will witness a secular decline and reach 77.4 per cent in 2030-31. In the base scenario, real GDP growth of 7.3 percent per year is forecast for the forecast period. CPI inflation is forecast at 4.3 percent per year and remains stable at this level for the alternative scenarios.

Four scenarios

In scenario 1, the debt-to-GDP ratio rises in the short term, capturing the short-term trade-off, but then falls to 75.3 percent by 2030/31.

Scenario 2 is similar to scenario 1 in that the decision for an energy efficient transition is problematic in the short term, but brings gains in the long term by reducing the debt ratio to 76.2 percent by 2030/31.

In scenario 3, digitalization impacts the path of fiscal consolidation through higher productivity, so that the debt ratio is 75.9 percent at the end of the forecast period.

Scenario 4 combines all measures and shows that the debt ratio falls to 73.4 percent by 2030/31

IMF opinion

The IMF's December 2023 country report noted that given the shocks India has experienced in the past and the instances of fiscal default between 2000 and 2020, the baseline scenario risks debt reaching 100 percent of GDP in the medium term in the event of similar shocks would exceed.

“Achieving the authorities' deficit target (below 4.5 per cent of GDP) in FY26 and then maintaining further fiscal tightening would rebuild buffers more quickly, thereby protecting against shocks.

“This would also reduce the interest burden on the budget (currently about a third of tax revenue) and create space for spending that supports long-term growth, such as infrastructure, health, and climate protection and adaptation,” the IMF statement said. Report.

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