New Delhi: The expert committee set up by the finance ministry under former revenue secretary N.K. Singh to review the fiscal discipline law has recommended a sustainable debt path as the principal macro-economic anchor of India’s fiscal policy and has favoured reducing debt to GDP ratio to 60% by 2023 from 68.5% in 2016.

The rating agency Standard and Poor’s in its rating review for India in November last year said upward pressure on the ratings could build if the government’s reforms markedly improve its general government fiscal outturns and, with them, the level of net general government debt so that it falls below 60% of GDP.

So far, the government has been mainly targeting to reduce fiscal deficit and revenue deficit under the existing fiscal responsibility and budget management (FRBM) Act.

For debt stock to grow or fall two things are important: the difference between nominal GDP growth and interest rate; and primary deficit, which is government borrowing excluding interest payments. A higher difference of nominal GDP and interest rate increases the ability of the government to serve debt, thus reducing debt stock and debt to GDP ratio.

On the other hand, a lower primary deficit or primary surplus also helps bring down debt to GDP ratio.

The Economic Survey for 2016-17 said India will have a favourable debt dynamics for the next decade as it’s nominal GDP growth is expected to be in the range of 11-14 and interest rate of 7-7.5% with a differential of around 4-6.5%.

However, a primary deficit remains a vulnerability for India. Put simply, it signifies India’s state and Central governments are not collecting enough revenue to cover their running costs, let alone the interest on its debt obligations.

“As a result of running a primary deficit, the government is dependent on growth and favourable interest rates to contain the debt ratio. In fact, in the aftermath of the GFC as growth slowed and disinflation occurred, debt levels started to rise again," the Economic Survey said.

D.K. Joshi, chief economist at Crisil Ltd; said that India needs to significantly improve its tax to GDP ratio to be able to serve its running cost without borrowing and thus maintain a primary surplus.

“India also has to maintain a high growth rate while interest rate has to ease down sharply for significantly bringing down debt to GDP ratio," Joshi said.

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