The dispute on India’s debt burden
Context:
The recent International Monetary Fund (IMF) observations on India’s long-term debts and the reclassification of its exchange rate regime have raised concerns and prompted reactions from the Indian Government. The IMF’s assessment calls for a more prudent management of debt in the medium term, highlighting potential risks and challenges for India’s economic stability.
Relevance:
GS-03 (Economy)
Mains Question:
Discuss the challenges posed by the increasing public debt in developing countries, with a special emphasis on India. Analyze the potential impact on economic sustainability and the measures needed to address the concerns raised by international organizations like the IMF. (250 words)
Dimensions of the Article:
- Debt Sustainability Concerns
- Global Debt Scenario
- Credit Ratings and Fiscal Challenges
- Fiscal Correction Challenges
Debt Sustainability Concerns:
- The IMF, in its annual Article IV consultation report, expressed apprehensions about the long-term sustainability of India’s debts.
- According to the report, India’s government debt could reach 100% of GDP by fiscal 2028 under adverse circumstances. The primary concern stems from the substantial investment required to meet climate change mitigation targets and enhance resilience to climate-related challenges and natural disasters.
- The IMF suggests the need for new and concessional sources of financing, increased private sector investment, and the implementation of carbon pricing mechanisms.
- While the Finance Ministry rejects the IMF’s projections as a “worst-case scenario,” the debate underscores the delicate balance between government borrowings and economic development.
- Excessive debt can impede development due to limited access to financing, higher borrowing costs, currency devaluation, and sluggish growth. The United Nations has highlighted the global dilemma, where countries face the difficult choice between servicing their debt and meeting the needs of their people.
Global Debt Scenario:
- The global public debt has surged more than fourfold since 2000, reaching a record USD 92 trillion in 2022. Developing countries, including China, India, and Brazil, account for nearly 30% of this total.
- The increase in public debt in developing nations is attributed to growing development financing needs, the cost-of-living crisis, and the impact of climate change. This escalating debt trend poses challenges for developing countries, especially concerning the higher interest rates they must bear. The number of countries facing significant debt levels has risen from 22 in 2011 to 59 in 2022.
- The IMF’s projections for India must be interpreted in the broader context of the persistent debt challenges faced by developing nations globally.
Credit Ratings and Fiscal Challenges:
- India grapples not only with managing public debt but also with the challenge of improving its credit ratings. Despite being the fastest-growing major economy, India’s sovereign investment ratings have remained unchanged for an extended period. Rating agencies, including Fitch Ratings and S&P Global Ratings, have maintained India’s credit rating at ‘BBB- with a stable outlook’ since August 2006.
- The rating agencies cite India’s weak fiscal performance, burdensome debt stock, and low per capita income as factors influencing the sovereign rating. India’s public debt-to-GDP ratio stands at 84% in 2022-23, higher than the levels specified by the Fiscal Responsibility and Budget Management Act (FRBMA). The fiscal challenges are further exacerbated by signs of potential slippage in FY24 due to increased expenditure on employment guarantee schemes and subsidies.
Fiscal Correction Challenges:
- Despite robust growth in tax collections, the possibility of fiscal slippage in FY24 raises concerns. The India Ratings and Research (IR&R) report attributes this potential slippage to higher expenditure on employment guarantee schemes and subsidies.
- Increased fertilizer subsidies and higher allocations for the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) signal a deviation from the budgeted figures. The upcoming general elections contribute to increased subsidies, but the surge in MNREGA outlay raises questions about rural employment and livelihoods.
- While the IMF’s debt projections may represent a medium-term worst-case scenario, the short-term challenge of adhering to the fiscal correction path in an election year becomes crucial to avoiding adverse outcomes.
Way Forward:
- Addressing India’s debt sustainability requires a multifaceted approach. Prudent fiscal management, diversification of financing sources, and attracting private sector investments are essential components. The government must prioritize climate change mitigation and resilience efforts, seeking innovative and concessional financing mechanisms.
- Improving credit ratings demands a focus on enhancing fiscal performance, reducing debt burdens, and raising per capita income. Structural reforms to stimulate economic growth and job creation become imperative. The government’s commitment to adhering to the fiscal correction path, especially in the face of election-related pressures, will play a crucial role in mitigating short-term fiscal challenges.
