IMF Warning on India’s Debt

IMF Warning on India’s Debt

Subject :Economy

Section: External sector

Context: The IMF warns that India’s general government debt may exceed 100% of GDP by 2028 in the medium term.

• Long-term risks are identified due to the need for significant investment in climate resilience
• New concessional financing, increased private sector investment, and carbon pricing are recommended.

Sovereign Debt Risks Disagreement:

• The Indian government disagrees with the IMF, stating sovereign debt risks are limited.
• Sovereign debt is mainly denominated in domestic currency, reducing vulnerability.
• India disputes the IMF’s baseline, considering the risk of debt exceeding 100% of GDP extreme.
• Points out the limited risks from sovereign debt, highlighting historical stability.

Exchange Rate Reclassification:

• The IMF reclassifies India’s exchange rate regime to a “stabilized arrangement.”
• India disputes this, emphasizing the importance of exchange rate flexibility.

Optimistic Outlook and Structural Reforms:

• IMF provides a fairly optimistic outlook for India’s economy.
• Potential for faster growth than the IMF’s forecast of 6.3% with key structural reforms.

Medium-Term Fiscal Consolidation Urged:

• IMF calls for “ambitious” fiscal consolidation over the medium term to control public debt.
• Identifies potential challenges, including global growth slowdown, supply disruptions, weather shocks, and inflationary pressures.
• 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% in 2005-06 to 84% in 2021-22, and back to 81% in 2022-23.

Challenges in Credit Ratings:

• India faces challenges in enhancing credit ratings due to elevated debt levels and servicing costs.
• Agencies attribute India’s lower rating to weak fiscal performance, burdensome debt stock, and low GDP per capita.

Per Capita Income and Uneven Distribution:

• India’s per capita income doubled since 2014-15, reaching Rs 1,72,000.
• Uneven income distribution, exacerbated by the Covid-19 pandemic, remains a challenge.

Expert Perspectives on Sovereign Rating:

• Experts suggest considering the improving quality of government expenditure in sovereign ratings.

Debt-to-GDP ratio

Debt-to-GDP ratio is a financial metric that compares a country’s total debt to its gross domestic product (GDP).

It is expressed as a percentage and provides insight into the ability of a country to manage its debt relative to the size of its economy.

The formula for calculating the Debt-to-GDP ratio is as follows:

Debt-to-GDP Ratio = (Total Debt/Gross Domestic Product) × 100

In this formula:

• Total Debt refers to the cumulative debt of a country, including both internal and external debt.
• Gross Domestic Product (GDP) is the total value of all goods and services produced within the country’s borders within a specific time frame.

A higher Debt-to-GDP ratio indicates that a country has a higher level of debt relative to its economic output.

While a certain level of debt is normal for most countries, an excessively high ratio can signal potential risks, such as challenges in servicing the debt or economic vulnerability. Central banks, policymakers, and economists closely monitor the Debt-to-GDP ratio as part of assessing a country’s fiscal health and economic stability.