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Interpretation That Public Debt-To-GDP Could Exceed 100% 'Misconstrued': Finance Ministry

Certain presumptions have been made taking into account possible scenarios that do not reflect factual position, the press note said.

<div class="paragraphs"><p>(Source: Freepik)</p></div>
(Source: Freepik)

The Ministry of Finance has said that recent interpretations that general government debt-to-GDP ratio could exceed 100% in the near future are "misconstrued".

In light of the International Monetary Fund’s latest Article IV consultations with India, certain presumptions have been made taking into account possible scenarios that do not reflect factual position, the press release issued on Friday said.

It is important to note that general government debt—that includes debt of both the central government and the state—in India is overwhelmingly rupee-denominated, with external borrowings from bilateral and multilateral sources, contributing a minimal amount, it said, adding that this has been highlighted in the IMF report.

Domestically issued debt, largely in the form of government bonds, is mostly medium or long-term, with a weighted average maturity of roughly 12 years for central government debt. Therefore, the rollover risk is low for domestic debt, and the exposure to volatility in exchange rates tends to be on the lower end, it explained.

Key Highlights

  • Among the various favourable and unfavourable scenarios given by the IMF, under one extreme possibility, like once-in-a-century Covid-19, it has been stated that the general government’s debt could be “100% of debt to GDP ratio” under adverse shocks by FY28. It talks only of a worst case scenario and is not fait accompli.

  • Similar IMF reports for other countries show much higher extreme scenarios for them. The corresponding figures of ‘worst-case’ scenarios for the U.S., U.K. and China are about 160, 140, and 200%, respectively, which is far worse as compared with 100% for India.

  • It is also noteworthy that the same report indicates that under favourable circumstances, the general government debt-to-GDP ratio may decline to below 70% in the same period. Therefore, any interpretation that the report implies that general government debt would exceed 100% of GDP in the medium-term is misconstrued.

  • The shocks experienced this century by India were global in nature, e.g., the global financial crisis, Taper Tantrum, Covid-19, Russia-Ukraine war, etc. These shocks uniformly affected the global economy and barely a few countries remained unaffected. Therefore, any adverse global shock or extreme event is expected to unidirectionally impact all the economies in an interconnected and globalised world.

A cross-country comparison shows that India has done relatively well and is still below the debt level of 2002, the release said.

The general government debt (including both state and central government) has steeply declined from about 88% in FY21 to about 81% in FY23, and the central government is on track to achieve its stated fiscal consolidation target to reduce fiscal deficit below 4.5% of GDP by FY26, it said. 

The states have also individually enacted their fiscal responsibility legislation, which is monitored by their respective state legislatures. Therefore, it is expected that the general government debt will decline substantially in the medium- to long-term, the release said.

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