GS Paper III

News Excerpt:

Recently,  the International Monetary Fund (IMF) cautioned India on rising government debt vulnerabilities.

More about News:

• IMF’s latest Article IV consultations with India, said India's general government debt, which includes federal and state government debt, could be 100% of GDP under adverse circumstances by fiscal 2028.
• It also cautioned that long-term debt sustainability risks were high due to the significant investment required to meet India’s climate change mitigation targets.
• While India’s budget deficit has eased, public debt remains elevated and fiscal buffers need to be rebuilt.
• The IMF encouraged the government to put in place a sound medium-term fiscal framework to promote transparency and accountability and align policies with India’s development goals.

Reason for the high risks of long-term debt sustainability

• Long-term risks are high because considerable investment is required to reach India’s climate change mitigation targets and improve resilience to climate stresses and natural disasters. 
• This suggests that new and preferably concessional sources of financing are needed, as well as greater private-sector investment and carbon pricing or equivalent mechanisms are needed.

What is Public Debt (Government Debt)?

• Public debt is the total amount, including total liabilities, borrowed by the government to meet its development budget. 
• It has to be paid from the Consolidated Fund of India. 
• The central government broadly classifies its liabilities into two categories — debt contracted against the Consolidated Fund of India, and public account.
• Over the years, the Union government has followed a considered strategy to reduce its dependence on foreign loans in its overall loan mix. 
• Internal debt constitutes over 93 per cent of the overall public debt. 

• • Internal loans that make up the bulk of public debt are further divided into two broad categories – marketable and non-marketable debt.

•  The sources of public debt are dated government securities (G-Secs), treasury bills, external assistance, and short-term borrowings.
• According to the Reserve Bank of India Act, of 1934, the RBI is both the banker and public debt manager for the government. The RBI handles all the money, remittances, foreign exchange and banking transactions. The Union government also deposits its cash balance with the RBI.

Challenges faced by India regarding public debt:

In October 2023, the finance minister of India said that the government is looking at ways to bring down government debt and is monitoring the debt reduction measures taken by emerging market economies.

• The central government’s debt stood at Rs 155.6 trillion, or 57.1% of GDP, at the end of March 2023. During the same period, the debt of state governments stood at about 28% of GDP (According to Mint).
• India faces challenges in enhancing its credit ratings due to elevated debt levels and the substantial cost associated with servicing that debt.
• Despite being called a ‘bright spot’ in the global economy, the Indian economy seems to be just carrying on in terms of sovereign investment ratings.
• Agencies believe that India’s stronger fundamentals are undermined by the government’s weak fiscal performance and burdensome debt stock, as well as the economy’s low GDP per capita. (According to the Business Daily).
• Uneven income distribution remains a challenge, exacerbated by the Covid-19 pandemic which gave rise to the ‘K-shaped’ growth phenomenon.
• According to experts, India’s low per capita income is a major factor that pulls down India’s score in the sovereign rating.
• However, others say that the rating agencies should take into account that the quality of government expenditure has been improving. This will help in improving economic growth, through a stronger multiplier effect.

Stance of the government on IMF report:

• Stating its position on the IMF’s report, the Finance Ministry  asserted that the Centre was on track to achieve its stated fiscal consolidation target (to reduce fiscal deficit below 4.5 per cent of GDP by FY 2025-26). 
• The finance ministry underscored that India’s general government debt is overwhelmingly rupee-denominated, with external borrowings (from bilateral and multilateral sources) contributing a minimal amount.
• The Union finance ministry noted that the general government debt, comprising both central and state debt, as a share of gross domestic product declined from about 88% of GDP in 2020-21 to 81% in 2022-23.
• 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 at the lower end.
• It further said the shocks experienced this century by India were global in nature, such as the global financial crisis, taper tantrum, Covid-19, the Russia-Ukraine war.
• These shocks uniformly affected the global economy and barely few countries remained unaffected.

Conclusion:

In response to the IMF's scenario-based assessment on India's debt levels, the Union Finance Ministry clarified that certain presumptions were misconstrued, emphasising a steep decline in general government debt and comparing favourably with other nations. Acknowledging the need for fiscal consolidation, the ministry stressed the report's extreme scenario nature. The suggestions involve continued fiscal prudence and transparency to align policies with India's development goals.