Centre aims to reduce debt-GDP ratio by 1 percentage point annually till it reaches 50%

New Delhi: The Union government plans to aggressively achieve a 1 percentage point reduction in its debt-to-GDP ratio annually from 2024-25 till it is down to a more sustainable 50%.

It then aims to further shrink the ratio, used to gauge a country’s ability to repay its debt, by 0.5 percentage points annually, two people aware of the matter said.

“Reducing the debt to GDP is a long-term objective of the central government. We have done a lot of simulations on this. We will be able to reduce the debt to GDP every year by about 1 percentage point till we reach the 50% mark. Though this is ambitious, it is doable,” the first person mentioned above said, requesting anonymity.

“Once we reach 50%, we can work towards reducing the debt to GDP by 0.5 percentage point every year as we don’t want to constrain growth,” the person added.

Govt debt expected to stand at 56.8% of GDP in FY25

Government debt will escalate to  ₹185.27 trillion, or 56.8% of GDP, during the financial year 2024-25 (FY25), according to budget estimates, up from  ₹93.26 trillion, or 49.3% of GDP, in 2018-19, minister of state for finance Pankaj Chaudhary told the Lok Sabha last week.

Also Read: India’s government debt at safe levels: Nirmala Sitharaman

The ratio stood at 52.3% in 2019-20, 61.4% in 2020-21, 58.8% in 2021-22, 57.9% in 2022-23, and 58.2% in 2023-24.

The increase in debt was due to higher spending on infrastructure and social schemes aimed at stimulating economic growth.

The onset of the pandemic in 2019-20 worsened the situation, pushing the debt to  ₹121.86 trillion, or 61.4% of GDP, in FY21.

The Centre resorted to extensive borrowing to fund relief measures and stimulus packages, a necessary response to the economic fallout of the pandemic, which further pushed up the debt.

“Once the debt falls considerably, we will not be in a debt trap. We will also be on a declining path in the fiscal deficit front,” said the person mentioned above.

“At that level, further compression of the deficit (fiscal deficit) may affect growth, so we have to make the trade-off carefully,” the person added.

Also Read: Debt, not deficit: Aim for more clarity in next generation of fiscal rules

“The Centre intends to have enough focus and enough space that if another crisis of the proportion we saw four years ago were to come back, there should be enough space available for fiscal policy to respond. The goal is to bring the total debt to a more sustainable level,” said the second person mentioned above, who didn’t want to be named.

"India is a country which can grow at a high rate over a reasonably longer time. So there will be a need for more investments. We can sustain higher debt for the long term, but not at the current level of 56% (debt to GDP ratio). We will have to bring the debt down," the person mentioned above added.

Last month, rating agency Fitch said in a report that sustained fiscal consolidation that helps lower the debt-to-GDP ratio over the medium term could boost India's prospects for a rating upgrade.

Also Read: Lower debt-to-GDP ratio could boost India’s chances of a credit rating upgrade: Fitch

A sovereign credit rating measures a government’s ability to repay its debt.

A higher rating indicates greater trust in the ability to repay, and consequently, lower borrowing costs.

While S&P and Fitch rate India at BBB-, Moody’s rates the South Asian country at Baa3, which indicates the lowest possible investment grade.

India has maintained that its economic health has improved considerably since the pandemic, and finance ministry officials have met rating agency officials to press for an upgrade.

During May, S&P Global sparked hopes for a long-awaited sovereign ratings upgrade for India, raising its country outlook to positive from stable after 14 years.

A finance ministry spokesperson didn't respond to emailed queries.

"The states are likely to continue to maintain a fiscal deficit to GDP target of 3%. They have also not changed their fiscal deficit target in their Fiscal Responsibility Legislations (FRLs). Accordingly, states’ debt-GDP ratio would stabilise at 30%. Together, the combined debt-GDP ratio of the Centre and the states would settle at 70%," said D.K. Srivastava, chief policy advisor, EY India.

"This implies that the government sector would be pre-empting nearly all of the available investible surplus if the household sector financial saving is close to 5% of GDP and the net inflow of capital is maintained at about 2% annually, leaving hardly any investible resources for the private and the non-government public sectors," he added.