The FY22 budget omitted any talk of the debt-to-GDP ratio even in the ‘Medium Term Fiscal Policy Cum Fiscal Policy Strategy Statement’, though the finance ministry through an amendment to the FRBM Act in FY19 had included it as the key fiscal target, promising to bring it down to 60% by FY25
The government has for the first time revealed that it expects India’s debt-to-GDP ratio to go up in FY22 to a 16-year-high of 61.7% from 60.5% a year ago.
According to the Reserve Bank of India’s Handbook of Statistics on the Indian Economy, the Centre’s debt was only higher than FY22 projection in FY06 at 63.9% of gross domestic product.
The rising debt level is a key concern for rating agencies. S&P Global Ratings last month while retaining India’s sovereign rating at the lowest investment grade with a stable outlook cautioned that it may lower the ratings if recovery is significantly slower than it expects from FY22 onwards—or if net general government deficits and the associated accumulation of indebtedness exceed its forecasts.
Government debt includes the stock of total liabilities due to internal debt raised through treasury bills, bonds and securities; external debt mainly raised from multilateral institutions; and public account liabilities such as provident fund commitments and National Small Savings Fund.
The FY22 budget omitted any talk of the debt-to-GDP ratio even in the ‘Medium Term Fiscal Policy Cum Fiscal Policy Strategy Statement’, though the finance ministry through an amendment to the Fiscal Responsibility and Budget Management (FRBM) Act in FY19 had included it as the key fiscal target, promising to bring it down to 60% by FY25. Finance minister Nirmala Sitharaman in her budget speech, however, gave a new fiscal consolidation path, to bring down the fiscal deficit to below 4.5% of GDP by FY26 from 6.8% budgeted for FY22.
“We hope to achieve the consolidation by first increasing the buoyancy of tax revenue through improved compliance, and second by increased receipts from monetization of assets, including public sector enterprises and land," she said.
The 15th Finance Commission (FFC), which was chaired by N.K. Singh, has recommended bringing the public debt-to-GDP ratio down from 89.8% of GDP in FY21 to 85.7% of GDP in FY26. The commission has recommended setting up of a high-powered inter-governmental group for crafting a new FRBM framework and oversee its implementation.
“Government’s amendment of the FRBM Act will target a path of fiscal consolidation aimed towards reaching a level of fiscal deficit below 4.5 % of GDP by 2025-26. Amendment to the FRBM debt targets will be in consonance with the broad fiscal deficit path indicated above," minister of state for finance Pankaj Chaudhary told Rajya Sabha on Tuesday.
S&P Global Ratings last month projected overall net general government debt including those of states to stabilize at slightly more than 90% of GDP in FY22 against India’s pre-pandemic net debt stock of 74% of GDP. The rating agency includes recapitalization bonds which have been issued to inject capital into public sector banks on the general government’s balance sheet as well as liabilities of Indian Railways Finance Corp.
“As we have been saying, growth is most important for debt sustainability, and given the anticipated growth for India this year and going forward, we maintain that the debt sustainability will not be a problem," chief economic adviser in the finance ministry, K. Subramanian last month told Mint in an interview.
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