India is on a path of fiscal consolidation and the general government debt is expected to decline substantially in the medium- to long-term, the finance ministry said Friday.
It said the International Monetary Fund’s latest Article IV consultation’s staff report highlighting that the general government debt could be 100% of GDP by FY28 was in a worst-case scenario and was not a ‘fait accompli’..
“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 ministry said.
The ministry pointed out that India had been able to reduce its general government debt (including centre and state) to 81% in FY23 from 88% in FY21 and the centre was on track to achieve its stated fiscal consolidation target. The Centre aims to bring down its fiscal deficit to 4.5% by FY26 from 5.9% in FY24.
“It is important to note that General Government Debt in India is overwhelmingly rupee-denominated, with external borrowings (from bilateral and multilateral sources) contributing a minimal amount,” the ministry stated, highlighting that rollover risk was low and largely immune from volatile forex movements.
The ministry also noted that the worst-case scenarios for USA, UK and China were much worse, leading to debt-to-GDP ratios of 160, 140, and 200, respectively.
India’s executive director KV Subramanian had also raised the issue of IMF’s estimates in his response to the staff report noting that the assessment was extreme.
“The staff assertion that the baseline carries the risk that debt would exceed 100% of GDP in the medium-term in the event of shocks that India has experienced historically sounds extreme,” Subramanian had noted.