Govt debt to GDP may fall in contrast to global trend: RBI report

Dismisses IMF's contention of ratio exceeding 100%

A strategic realignment of government spending is expected to lead to a decline of the general government debt-GDP ratio to 73.4 per cent by 2030-31 from an estimated 81.6 per cent in 2023-24, according to a report by the Reserve Bank of India which is in contrast to advanced and emerging economies where the ratio is expected to go up. The general government debt to GDP ratio is 81.6 per cent of GDP in 2023-24 (BE).

This projection stands notably lower than the IMF's estimate of 78.2 per cent.

The report highlighted the contrasting global trends, revealing an expected increase in the debt-GDP ratio for advanced economies from 112.1 per cent in 2023 to 116.3 per cent in 2028, and for emerging and middle-income countries from 68.3 per cent to 78.1 per cent within the same period.

The report titled ‘The Shape of Growth Compatible Fiscal Consolidation’ was authored by RBI staff including deputy governor Michael Debabrata Patra. The views expressed in the report are of the authors and do not represent the views of RBI.

The report said, “With recalibration of government expenditure, the general government debt-GDP ratio is projected to decline to 73.4 per cent by 2030-31, around 5 percentage points lower than the IMF’s projected trajectory of 78.2 per cent.”

“This is noteworthy as the debt-GDP ratio is projected to rise from 112.1 per cent in 2023 to 116.3 per cent in 2028 for advanced economies and from 68.3 per cent to 78.1 per cent for emerging and middle-income countries. It is in this context that we reject the IMF’s contention that if historical shocks materialise, India’s general government debt would exceed 100 per cent of GDP in the medium-term and hence further fiscal tightening is needed.”

It highlighted that the outstanding debt of the Union government is projected to decrease to 57.1 per cent of GDP in 2024-25 from 58.2 per cent of GDP in 2023-24. Looking ahead, the combination of a favourable interest rate compared to the growth rate and a primary deficit budgeted at 1.5 per cent of GDP in 2024-25 - down from 2.3 per cent of GDP in 2023-24 - is expected to sustain the consolidation of the Union government's debt. Additionally, over 95 per cent of the outstanding debt is issued in domestic currency, mitigating exchange rate risk, and the weighted average maturity of the outstanding stock of dated securities is 12.2 years, reducing rollover risk.

The medium-term synergy between fiscal consolidation and economic growth emphasizes the importance of prioritizing developmental expenditure in government budgets. Utilizing a dynamic stochastic general equilibrium (DSGE) model, the analysis reveals that directing resources towards productive, employment-generating sectors, transitioning to energy-efficient practices, and investing in digitalization can significantly reduce general government debt.