Spending boost amid weaker revenue collections led to higher borrowing
NEW DELHI :
The Union government's debt soared to 58.8% of the gross domestic product in the fiscal year ended March from 51.6% a year ago as the economic contraction forced the government to borrow a record amount to meet a revenue shortfall, finance ministry data showed, prompting experts to raise concerns over debt sustainability in the medium term.
The fiscal deficit widened to 9.2% of GDP in FY21 from 4.6% of GDP a year ago as revenue receipts contracted 3%, with the economy shrinking 7.3%. The contraction, the steepest in independent India, is ascribed to the disruption in economic activities caused by the first wave of the pandemic.
The Union 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 higher debt-to-GDP ratio in FY21 was mainly due to the GDP contraction, said Devendra Kumar Pant, chief economist at India Ratings. “Debt sustainability has to be viewed from a medium-term perspective. Despite covid-2.0, nominal GDP growth in FY22 would be closer to 14%. This will lead to debt-to-GDP falling at least by one percentage point. To have sustainable debt, strong growth momentum has to be maintained, which will also provide some relief to fiscal deficit," he added.
In May, rating agency Moody’s said India’s credit profile is increasingly constrained by obstacles to economic growth, a high debt burden and a weak financial system. “Should downside risks to growth or the financial system materialize, negative consequences for India’s fiscal strength would follow. The longer the period of relatively subdued growth, the more likely it is that India’s debt burden will continue to rise. And the crystallization of further contingent liabilities for the government, in the event of renewed financial support to financial institutions, would only add to the debt burden," it added.
The Fifteenth Finance Commission (FFC), in its report, said fiscal uncertainty is now at an all-time high amid covid. “Nominal GDP and government revenues are contracting in FY21 and placing distinct upward pressure on Union and states’ fiscal and debt positions. This upward pressure is unavoidable when growth destruction must be mitigated, and income support extended. This is the reason to consider flexibility. These are extraordinary times," it said while presenting the report last October.
The Fiscal Responsibility and Budget Management (FRBM) Act, as amended in 2008, mandated the debt-to-GDP ratio to serve as the medium-term anchor for fiscal policy, with the fiscal deficit as the operational target. It mandated the debt-to-GDP ratio of the Centre to be brought down to 40% and that of states to 20% by 2024-25. FFC has recommended setting up an FRBM review panel to draft a new fiscal consolidation framework because the current challenges have made the earlier targets impossible to achieve.
The general government debt, including states and Centre’s debt, may have crossed 90% in FY21. The FFC has recommended a slow and gradual decline in central government and general government debt to 56.6% and 85.7% (of GDP), respectively, by FY26 due to adverse debt dynamics over the next few years.
(A previous version of this story incorrectly said the debt-to-GDP story was at a 15-year high. The last time the figure was higher indeed was 15 years ago but it was at the same level as now in 2007-08.)