On Friday while announcing the first RBI MPC decision of the Financial Year 2024-25 (FY25), RBI Governor Shaktikanta Das said that concerns about the high levels of public debt in both advanced and emerging market economies (EMEs) are dormant risks which could erupt abruptly.
Debt to GDP ratios, which rose during the pandemic, remain elevated and are projected to increase further with rising interest burden and cost of borrowing, thus raising debt sustainability concerns, he said.
Worsening debt situation in advanced economies (AEs) can generate spillovers for EMEs in the form of swings in capital flows and volatility in financial markets. EMEs with rising levels of public debt, in particular, would be vulnerable to these spillover effects.
According to the International Monetary Fund (IMF), the gross public debt to GDP ratio of AEs increased from 104.1 per cent in 2019 to 122.9 per cent in 2020. This ratio came down to 112.3 per cent in 2022 and is projected to increase to 116.3 per cent in 2028.
Credible fiscal consolidation plans, particularly in major advanced economies, focusing on growth enhancing investment would be necessary to address this challenge.
For EMEs, the gross public debt to GDP ratio increased from 55.9 per cent in 2019 to 65.9 per cent in 2020. This ratio came down marginally to 65.3 per cent in 2022 and is projected to rise to 78.1 per cent in 2028, as per the Fiscal Monitor, October 2023.
India, however, presents a different picture on account of its fiscal consolidation and faster GDP growth.
According to the IMF, the general government debt to GDP ratio of India increased from 75.0 per cent in 2019 to 88.5 per cent during the pandemic year 2020. This ratio came down to 81.0 per cent in 2022 and is projected to decline to 80.5 per cent in 2028.
India’s debt-to-GDP ratio is “well below other emerging markets”, Finance Minister Nirmala Sitharaman said while speaking in the Parliament on February 7.
Her remarks came months after the IMF, while releasing a set of projections, flagged the possibility of India’s general government debt exceeding 100 percent of the gross domestic product (GDP).
According to a report by the Reserve Bank of India which is in contrast to advanced and emerging economies where the ratio is expected to go up, strategic realignment of government spending is expected to lead to a decline of the general government debt-GDP ratio to 73.4 per cent by 2030-31 from an estimated 81.6 per cent in 2023-24.
The report titled ‘The Shape of Growth Compatible Fiscal Consolidation’ was authored by RBI staff including deputy governor Michael Debabrata Patra. The views expressed in the report are of the authors and do not represent the views of RBI.
