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Business News/ Economy / IMF warns of India's rising debt and climate change risks, but govt disagrees, says report
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IMF warns of India's rising debt and climate change risks, but govt disagrees, says report

'Long-term risks are high because considerable investment is required to reach India’s climate change mitigation targets and improve resilience to climate stresses and natural disasters,' the IMF said.

The IMF has raised concerns about the long-term sustainability of India’s debt (Image: iStockphoto)Premium
The IMF has raised concerns about the long-term sustainability of India’s debt (Image: iStockphoto)

The International Monetary Fund (IMF) has raised concerns about the long-term sustainability of India's debts. It cautioned that general government debt is likely to exceed 100 percent of India's gross domestic product (GDP) in the near future, Business Standard reported. The need for significant investment towards climate change targets was also in focus.

“Long-term risks are high because considerable investment is required to reach India’s climate change mitigation targets and improve resilience to climate stresses and natural disasters. This suggests that new and preferably concessional sources of financing are needed, as well as greater private sector investment and carbon pricing or equivalent mechanism," the IMF said in its annual Article IV consultation report.

Also Read: India Expected to contribute over 16% to global growth, says IMF

Disagreement from the Indian Government

However, the Indian government has contested these warnings, stating that risks associated with sovereign debt are notably limited as it is mainly in domestic currency. KV Subramanian, India’s executive director at the IMF, expressed disagreement with the IMF's projections in the same report, citing historical shocks experienced by India and emphasising the limited increase in the public debt-to-GDP ratio.

He said, “The same can be said of the staff prognosis that debt sustainability risks are high in the long term. The risks from sovereign debt are very limited as it is predominantly denominated in domestic currency. Despite the multitude of shocks, the global economy has faced in the past two decades, India’s public debt-to-GDP ratio at the general government level has barely increased from 81 percent in 2005-06 to 84 percent in 2021-22, and back to 81 percent in 2022-23."

Also Read: IMF reclassifies India's exchange rate regime to 'stabilised Arrangement' due to RBI's Forex interventions

Divergent Views on Exchange Rate

The IMF also reclassified India’s exchange rate regime, terming it a "stabilised arrangement" instead of "floating". This change was met with opposition from the Indian side, dismissing it as “unjustified" and based on “subjective selection".

While the IMF highlighted concerns over foreign exchange intervention (FXI) impacting the rupee-USD exchange rate, the Reserve Bank of India (RBI) strongly disagreed, asserting that their interventions were necessary to curb excessive volatility. Subramanian also argued against the IMF's characterisation, insisting on the continued importance of exchange rate flexibility in absorbing external shocks.

Also Read: The IMF hasn't got its analysis of India's foreign exchange regime right

'The IMF doesn't understand India's domestic compulsions. Since imported inflation is a crucial element of India’s overall inflation that impacts 1.4 billion people, the central bank has to actively manage the rupee volatility," a government official told the paper.

Growth Outlook and Inflation Control

The IMF acknowledged India's effective inflation management amidst global commodity price hikes through extensive government interventions. It has projected a balanced outlook for India's economic growth, citing an upward revision in the medium-term potential growth rate at 6.3 percent, from the 6 percent estimated earlier. However, the Indian government expressed greater optimism, estimating a potential growth rate of 7-8 percent.

Also Read: India is IMF's star performer but the report isn't all glowing

Subramanian attributed India's lower inflation rate during the pandemic to a unique economic policy rather than extensive government intervention. He emphasized the careful mix of demand-side and supply-side measures implemented by India.

Contradictory Views on Financial Sector Vulnerabilities

In contrast to the IMF's concerns about vulnerabilities in non-banking financial companies (NBFCs), Subramanian refuted the notion, stating that there are no lingering vulnerabilities in NBFCs. He highlighted the strong macro fundamentals and predicted a broadening investor base with forthcoming inclusion in emerging government bond indices.

Also Read | India should phase out its restrictive trade policies: IMF

“Staff scenario that a sudden increase in sovereign risk premia could weigh on balance sheets and bank lending appetite appears far-fetched, given the strong macro fundamentals. The forthcoming inclusion in emerging government bond indices will broaden the investor base and diversify risks," he added.

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Published: 22 Dec 2023, 10:29 AM IST
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