Nirmala Sitharaman spearheaded India’s Finance Ministry responded to the International Monetary Fund’s recent cautionary report regarding the country’s alleged vulnerabilities in government debt. Contrary to the IMF’s concerns, the ministry highlighted discrepancies in the assumptions made, stressing that the factual situation differed from the projected scenarios.
A significant portion of India’s general government debt, encompassing both central and state debts, exists in rupees, with external borrowings constituting a minor fraction. This assertion by the ministry aimed to underscore the minimal risk associated with domestic debt rollovers.
“In the light of the International Monetary Fund’s latest Article IV consultations with India, certain presumptions have been made taking into account possible scenarios that does not reflect factual position,” Union finance ministry said in a statement issued on Friday late night.
Highlighting a significant reduction in general government debt from around 88% in FY 2020-21 to approximately 81% in 2022-23, the ministry showcased a positive trend. Moreover, it outlined the Centre’s commitment to achieving its fiscal consolidation target by reducing the fiscal deficit to below 4.5% of GDP by FY 2025-26. This reaffirmed the government’s dedication to sound fiscal management despite global challenges
During its Article IV consultations with India, the IMF suggested that India’s general government debt could reach 100% of the debt-to-GDP ratio by FY 2028 in adverse circumstances. The finance ministry clarified that this projection was an extreme scenario akin to the once-in-a-century impact of Covid-19. It emphasised that the IMF’s assessment represented a worst-case possibility and not an inevitable outcome.
Comparatively, the ministry highlighted IMF reports for other nations, showcasing considerably higher extreme scenarios: 160% for the US, 140% for the UK, and 200% for China. Additionally, the IMF report for India indicated that, under favourable conditions, the General Government Debt to GDP ratio might decline to below 70% during the same period.
Despite global economic upheavals triggered by events like Covid-19 and the Russia-Ukraine conflict, India’s relative resilience was underscored by the ministry. It noted that India had fared relatively well and, notably, maintained a debt level lower than that of 2002.
Highlighting a significant reduction in general government debt from around 88% in FY 2020-21 to approximately 81% in 2022-23, the ministry showcased a positive trend. Moreover, it outlined the Centre’s commitment to achieving its fiscal consolidation target by reducing the fiscal deficit to below 4.5% of GDP by FY 2025-26. This reaffirmed Nirmala Sitharaman led Finance Ministry’s dedication to sound fiscal management despite global challenges.
More about IMF’s “Cautionary Report”
The International Monetary Fund (IMF) has warned that India’s general government debt may exceed 100% of gross domestic product (GDP) in the medium term, Business Standard reported saying that long-term risks are high because the country needs considerable investment to 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 mechanism,” the IMF said in its annual Article IV consultation report.
The IMF report is part of the Fund’s surveillance function under the Articles of Agreement with member countries. The Indian government, however, disagreed, saying that sovereign debt risks are limited as it is mainly denominated in domestic currency, the business daily said.
K.V. Subramanian, India’s executive director at the IMF, said the IMF’s assertion that the baseline carries the risk that debt would exceed 100% of GDP in the medium term in the event of shocks which India has experienced historically sounds extreme.
The IMF also reclassified India’s exchange rate regime to “stabilised arrangement,” but India disputes this, emphasising the importance of exchange rate flexibility.
In an accompanying statement to its report, IMF said that India needs “ambitious” fiscal consolidation over the medium term in order to curb its public debt.
“A sharp global growth slowdown in the near term would affect India through trade and financial channels. Further global supply disruptions could cause recurrent commodity price volatility, increasing fiscal pressures for India. Domestically, weather shocks could reignite inflationary pressures and prompt further food export restrictions. On the upside, stronger than expected consumer demand and private investment would raise growth,” it said.
Nirmala Sitharaman gave a stern reply; what is IMF’s outlook for India?
Despite the debt concerns, the IMF offers an optimistic outlook for India’s economy in its Article IV report, projecting the potential for faster growth if key structural reforms are implemented. The report stresses the necessity for “ambitious” fiscal consolidation to curb public debt.
It also outlines potential challenges, including global growth slowdown, commodity price volatility, and domestic weather shocks. The IMF underscored the impact of consumer demand and private investment on growth.
What challenges could Nirmala Sitharaman’s FM could face?
The Economic Times reported that global rating agencies, including Fitch, S&P, and Moody’s, have accorded India the lowest investment-grade rating, citing concerns over weak fiscal GDP per capita of the citizens of the country.
The ‘K-shaped’ growth phenomenon, exacerbated by the Covid-19 pandemic, has contributed to uneven income distribution, impacting India’s sovereign rating. Experts contend that the quality of government expenditure improvement could positively influence economic growth.
If debt has risen; how does Nirmala Sitharaman plan to tackle it?
In October of this year, Nirmala Sitharaman revealed the government’s commitment to exploring measures to reduce government debt. According to a report by Mint, the central government’s debt, as of March 2023, stood at Rs 155.6 Trillion, constituting 57.1% of GDP.
India faces challenges in enhancing credit ratings due to elevated debt levels and the heavy cost associated with servicing that debt. Despite being considered a ‘bright spot’ in the global economy, the country grapples with challenges affecting sovereign investment ratings.