The International Monetary Fund (IMF) has recently turned its attention towards India, delivering an annual Article IV consultation report that scrutinizes the country’s debt sustainability and exchange rate management. According to the report, there are concerns regarding the long-term debt sustainability of India.
It forecasts that India’s general government debt, which includes both the Centre and States, could rise to 100% of GDP by fiscal year 2028 especially under unfavorable circumstances. There is also a noted need for improved debt management practices, with a focus on financing for climate change mitigation goals and enhancing resilience against natural disasters. The Indian Finance Ministry has disputed the report, dismissing it as an overly negative prediction.
Exchange Rate Dynamics and Credit Ratings
The IMF has also altered its classification of India’s de facto exchange rate regime from “floating” to “stabilized arrangement”, signifying controlled fluctuations in the rupee due to RBI interventions. This follows stagnation in the country’s sovereign credit ratings, with agencies like Fitch, and S&P Global Ratings maintaining their rating at ‘BBB- with stable outlook’ since 2006 because of burdensome debt and low per capita income amongst other reasons.
Understanding the Global Debt Landscape
Global public debt has seen a significant increase, reaching over USD 92 trillion in 2022 – a more than four times growth since 2000 outstripping global GDP growth. The UN reports that in 2022, around 3.3 billion people resided in countries that spend more on interest payments than on health or education. Notably, developing countries, including India, China, and Brazil account for nearly 30% of the total global debt, impaired by factors like the cost-of-living crisis, climate change, and the pandemic.
India’s Current Debt Scenario
India’s national debt includes a central government debt at ₹155.6 trillion (approx 57.1% of GDP) and state government debt at 28% of GDP as of March 2023. These figures are higher than the limits outlined by the FRBM target, with India’s public debt-to-GDP ratio at 81% in 2022-23. High expenditure commitments, slow revenue growth, geopolitical events, tax evasion from the vast informal economy all contribute to India’s rising debt level.
Legislation for Debt Management and Exchange Rates in India
The Fiscal Responsibility and Budget Management Act, 2003 (FRBM Act) came into effect with the goal of instilling financial discipline and reducing fiscal deficit within the government. Despite this, disruptions induced by the pandemic resulted in elevated debt-GDP ratios that crossed the designated limits. India’s exchange rate regime, redefined by the IMF as a “stabilized arrangement”, indicates controlled fluctuations of the rupee value because of interventions by the RBI.
Sustainable Debt Management Measures for India
India can employ various short- and long-term strategies for managing its escalating debt. Fiscal consolidation through reforms like streamlining subsidies and reducing administrative inefficiencies can free up resources for debt repayment and investments. Strengthening tax administration and battling tax evasion can significantly improve revenue without borrowing excessively.
In the longer term, enhanced investment in human capital through education and skill improvement programs will raise productivity and competitiveness, leading to economic growth and improved tax collection. Also, diversification and incentives for high-value exports and addressing competitiveness issues can increase foreign exchange earnings, reducing the need for external debt.