The Dispute on India’s Debt Burden

Why in News?

• India's economic landscape has recently come under scrutiny following two noteworthy observations by the International Monetary Fund (IMF).
• The report not only recognised India's effective inflation management but also presented a balanced outlook for the country's economic growth.
• While analysing IMF's insights on India's economic situation, it is crucial to understand the broader global context in which these observations were made.

IMF's Insights on India's Economic Landscape

• Exchange Rate Reclassification
  • The IMF's decision to reclassify India's exchange rate regime from floating to a stabilised arrangement is a pivotal observation.
    • The term stabilised arrangement implies a level of management that might be viewed as excessive, raising questions about the flexibility of the currency and its alignment with market forces.
  • This reclassification suggests a perception that the rupee's movements are subject to a more controlled and stabilised environment, possibly due to central bank (RBI) interventions.
• Debt Sustainability Concerns
  • The more significant concern voiced by the IMF revolves around the long-term sustainability of India's debts.
  • The report indicates that, under adverse circumstances, India's general government debt (encompassing both the central and state governments) could reach 100% of GDP by fiscal 2028.
  • This projection underscores the need for careful debt management strategies, especially as India faces substantial investment requirements to meet climate change mitigation targets and enhance resilience to climate stresses and natural disasters.
  • However, these IMF insights are within the broader global landscape of mounting public debts.
  • The report recognises that India's economic challenges are not isolated but are part of a complex, interconnected web of economic phenomena.

The Broader Context of Worrying Global Debt Scenario

• The Dual Nature of Debt: Accelerator vs. Drag on Development
  • Government borrowings have played a vital role in fostering development globally, enabling infrastructure projects, social programs, and economic growth.
  • However, the IMF's concerns highlight the potential downsides of this strategy.
  • The limitations in accessing financing, rising borrowing costs, currency devaluations, and sluggish growth can transform debt from a catalyst into a hindrance.
  • The United Nations' assertion that countries face the impossible choice between servicing their debt or serving their people summarises the inherent challenge in managing debt for sustainable development.
• Surging Global Public Debt Trends
  • According to the UN, global public debt has surged more than fourfold since 2000, outpacing the tripling of global GDP over the same period.
  • In 2022, global public debt reached a staggering USD 92 trillion, with developing countries contributing almost 30% to the total.
  • Notably, China, India, and Brazil account for a significant portion (70 %) of this share.
  • The acceleration of debt in developing nations, surpassing the pace in developed countries over the past decade, is attributed to heightened development financing needs exacerbated by the COVID-19 pandemic, the cost-of-living crisis, and the impact of climate change.
• Asymmetric Burden on Developing Countries
  • The burden of debt is not evenly distributed between developed and developing nations.
  • Developing countries, even without considering exchange rate fluctuations, often face higher interest rates compared to their developed counterparts.
  • This disparity is well-documented, with countries in Africa borrowing at rates four times higher than the United States and eight times higher than Germany, undermining the debt sustainability of developing economies.
• Increasing Debt Levels and the IMF's Perspective
  • The number of countries facing high levels of debt has surged from 22 in 2011 to 59 in 2022, underscoring the persistent debt challenges in developing nations.
  • The IMF's projections for India should be viewed in this broader context of a global debt conundrum.

Challenges for India

• Increasing Public Debt
  • The central government's debt stood at ₹155.6 trillion, constituting 57.1% of GDP at the end of March 2023 and state government debts accounted for about 28% of GDP.
  • While the Finance Ministry asserts that India's public debt-to-GDP ratio has only marginally increased from 81% in 2005-06 to 84% in 2021-22, the 2022-23 figures indicate a return to 81%.
  • However, these levels surpass the targets specified by the Fiscal Responsibility and Budget Management Act (FRBMA).
• Balancing Public Debt for Sustainability
  • One of the primary challenges confronting India is the delicate balance required to ensure that public debt remains within sustainable levels.
  • The IMF's projections suggest that India's general government debt, inclusive of both the central and state governments, could reach 100% of GDP by fiscal 2028 under adverse circumstances.
  • This projection emphasises the need for meticulous debt management strategies to prevent the economy from reaching unsustainable levels.
• Stagnant Credit Ratings
  • Despite being lauded as the fastest-growing major economy and a 'bright spot' in the global economic landscape, India's sovereign investment ratings have remained stagnant for an extended period.
  • Both Fitch Ratings and S&P Global Ratings have maintained India's credit rating at 'BBB-' with a stable outlook since August 2006.
  • This rating sits at the lowest investment-grade level, and the lack of upward movement suggests persistent challenges.
  • The stagnancy in credit ratings is attributed to several factors. While India boasts the status of the fastest-growing major economy, the government's weak fiscal performance and burdensome debt stock weigh heavily on its creditworthiness.
  • Additionally, India's low per capita income contributes to a lower sovereign rating. The correlation between elevated debt levels, substantial servicing costs, and credit ratings becomes apparent, highlighting the intricacies of India's economic landscape.
• Emerging Fiscal Challenges
  • The disruptions caused by the COVID-19 pandemic have contributed to the present high levels of debt-GDP ratio.
  • Despite robust growth in tax collections, fiscal challenges loom and as per India Ratings and Research (IR&R), there is a possibility of fiscal slippage in FY24, attributing it to increased expenditure on employment guarantee schemes and subsidies.
  • The budgeted fertiliser subsidy of ₹44,000 crore was nearly exhausted by end-October 2023, prompting an increase to ₹57,360 crore.
  • Similarly, higher demand for employment under the MGNREGA has led to an overspending of ₹79,770 crore by December 19, 2023, against the budgeted ₹60,000 crore.
• Managing Short-Term Challenges and Election Dynamics
  • As India heads towards general elections, increased subsidies do not come as a surprise.
  • However, the amplified MNREGA outlay raises questions about employment growth and livelihoods in rural areas.
  • Navigating these short-term challenges in an election year poses a critical test for maintaining fiscal discipline and avoiding worst-case scenarios.

Way Ahead

• While the exchange rate reclassification points towards potential concerns about excessive management, the focus on debt sustainability reflects a broader call for prudence in managing fiscal policies.
• The IMF's observations hint at a delicate balancing act that India must perform – maintaining a stable exchange rate while ensuring that long-term debt remains sustainable.
• It also emphasises the necessity for new and preferably concessional sources of financing, greater private sector investment, and the implementation of carbon pricing or equivalent mechanisms to address long-term risks.

Conclusion

• In navigating the multifaceted challenges laid out by the IMF, India stands at a crucial juncture, requiring a strategic approach to its economic management.
• The observations made by the IMF, encompassing concerns about debt sustainability and the reclassification of the exchange rate regime, emphasise the need for nuanced decision-making and long-term planning.

Q1) What is the meaning of government borrowings?

Government borrowings refer to the funds that a government raises by issuing debt instruments such as bonds, treasury bills, or other securities. When a government needs additional funds to cover budgetary deficits or finance specific projects, it may resort to borrowing from various sources, including domestic and foreign investors, financial institutions, or international organisations.

Q2) What are credit ratings?

Credit ratings are assessments provided by credit rating agencies (CRAs) to evaluate the creditworthiness of entities that issue debt instruments, such as governments, corporations, or financial instruments like bonds and securities. The primary purpose of credit ratings is to provide investors and creditors with an indication of the risk associated with investing in or lending money to a particular entity.

Source: The Hindu