Home / News / India /  Onus is on growth revival as debt profile gets worse

NEW DELHI : India’s debt profile is set to worsen sharply in FY21 with mounting government borrowing and falling nominal gross domestic product (GDP), making growth revival all the more imperative.

The country’s debt-to-GDP ratio was worsening even before the covid-19 pandemic hit the economy, rising from 67.4% in FY12 to 72.2% in FY20. The higher level of borrowing and worsening growth outlook is likely to take India’s debt-to-GDP ratio to 87.6% in FY21, according to a report by the State Bank of India (SBI) released on Monday.

Union finance minister Nirmala Sitharaman on Saturday said the sovereign rating downgrades by credit rating agencies may limit policy options for emerging market economies in their fight against covid-19. However, analysts believe India should be more worried about its growth outlook than its debt profile and provide more fiscal support to revive growth rather than opt for fiscal conservatism.

Market participants and credit rating agencies appear to be less worried about the worsening of fiscal and debt positions in the short term, Prachi Mishra, chief India economist at Goldman Sachs, said last week in a presentation at the Delhi-based think tank National Council of Applied Economic Research. “They appear to be more concerned about the fact that India may not have the administrative and fiscal capacity to implement a large fiscal support and that would be a headwind to growth. What would reassure markets and avoid further credit rating downgrades is not lower fiscal spending in the short run as many perceive, but most importantly a strategy to revive growth, combined with a credible fiscal plan for the medium term," she said.

The current thinking of rating downgrade in policy circles is a false narrative as India’s rating is likely to face a litmus test of downgrade in FY21 depending on what the country has done to bring growth back to track, said Soumya Kanti Ghosh, group chief economic adviser at SBI. “Interestingly, the GDP collapse is pushing up the debt-to-GDP ratio by at least 4%, implying that growth rather than continued fiscal conservatism is the only mantra to get us back on track," he said.

How the debt dynamics evolve will depend on the evolution of real and nominal GDP growth and the government’s fiscal plan, Mishra said. “The debt-to-GDP ratios could start to decline from FY24, assuming interest-growth differential turns negative, putting a downward pressure on the debt dynamics and with continued consolidation of primary deficit by the government. Moreover, even when debt starts to decline, it would likely be at significantly higher levels than it is at present," she said.

The higher debt will also lead to shifting of the fiscal responsibility and budget management target of combined debt to 60% of the GDP by FY23 by seven years with the target seeming achievable only by FY30, Ghosh said.

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