11 January 2024 – The Indian Express

Public Debt Situation in India

• A balanced forecast for India’s economic development has been projected in the IMF’s most recent annual consultation report. Although the assessment recognised India’s successful control of inflation, it also raised questions about the long-term viability of India’s debt. The report underscores the necessity of implementing a prudent strategy for long-term debt management.

Which are the IMF Report’s Principal Findings?

• Long-term debt sustainability is a concern for India: under unfavourable conditions, the country’s government debt might surpass 100% of GDP by 2028.
• India’s exchange rate regime has been reclassified by the IMF, which now refers to it as a “stabilised arrangement” rather than “floating,” reflecting a change in the way that people view India’s currency management.
• The foreign exchange market’s supply and demand dynamics decide the exchange rate under a floating exchange rate system, while the government sets it in a stable arrangement.
• High Long-Term Risks in Debt Management: Due to the significant investment needed to meet India’s targets for mitigating climate change, there are high long-term risks associated with debt management.

Public Debt: What Is It?

About:

• The total amount of money that a government owes to both domestic and foreign lenders is referred to as public debt.
• All Union government liabilities that must be paid for out of the Consolidated Fund of India are included in the country’s total public debt.

Principal Types:

• The amount of a nation’s debt that is owing to foreign creditors, such as foreign governments, international organisations, and commercial companies operating outside of the nation, is known as its external debt.
• Debt due to lenders within the nation, such as individuals, banks, and other domestic establishments, is referred to as internal debt.
• Securities that are marketable or non-marketable are additional categories for internal debt.

Goals:

• Providing a steady and dependable source of revenue for government spending is one of the main goals, particularly in times of budget deficits.
• Stabilising the Economy: During economic downturns, public debt can be strategically employed as a countercyclical policy to stabilise the economy. Borrowing by the government to increase spending can boost the economy.
• Managing Liquidity: Governments can regulate the money supply and interest rates by using public debt as a tool to manage liquidity in the financial system.
• To Finance Development Plans: Public debt can be used to pay for important infrastructure projects, such as building public utilities, roads, and bridges. This promotes economic growth and helps to progress crucial industries like health care and education.

Mechanisms of Measuring:

• The ratio of public debt to GDP measures the amount of debt as a percentage of the nation’s GDP.
• A greater ratio means that there is more debt compared to the size of the economy.

What are India’s Main Concerns Regarding the Management of Public Debt?

India’s Growing Public Debt Levels:

• By the end of March 2023, the debt of the Union government stood at ₹155.6 trillion, or 57.1% of GDP, with the state governments contributing roughly 28% of GDP to the total debt.
• The ratio of India’s public debt to GDP increased little between 2005–06 and 2021–22, rising to 84% in 2021–22 and then returning to 81% in 2022–23.

Excessive Interest Refunds:

• In India, interest payments account for more than 5% of GDP and, on average, 25% of revenue receipts; these payments outweigh government investment on essential sectors like healthcare and education.

Fiscal Policy Restraints:

• In periods of economic depression, the government’s ability to implement counter-cyclical fiscal policies may be impeded by high amounts of public debt.
• This restriction may make it more difficult for the government to respond to shocks and economic difficulties.

Reduced Credit Scores:

• Long-term high levels of debt and deficits may result in rating agencies downgrading a country’s sovereign credit, which would boost the cost of external commercial borrowing and make it more expensive for the government to raise money from foreign markets.

Misuse of Tax Funds and the Cost to Future Citizens:

• A sizeable portion is given to government agencies where bribery, corruption, and red tape are commonplace, resulting in the misappropriation of tax dollars.
• Concerns about intergenerational equity may arise from the excessive accumulation of debt since future generations may be required to repay the principle and interest that was accumulated during the period of financial imprudence.
• Intergenerational burdens are affected by the capital inflow into state-run banks via recapitalization bonds.

Displacing Private Capital:

• Economic growth may be impacted by large government borrowings that absorb available cash in the financial system and drive out private investment.
• Businesses may encounter difficulties growing their operations, implementing new technology, or increasing productivity when private investment is squeezed out, which could have an effect on the economy’s ability to compete on the whole.

Risks to the Financial System:

• The stability of the financial system as a whole may be negatively impacted by systemic risks associated with a high concentration of debt in the system.

What Path Should We Take Next?

Sensible Position:

• Attain Fiscal Consolidation: In order to get a total debt-to-GDP ratio of 60% for the general government, the NK Singh Committee on FRBM had proposed a debt-to-GDP ratio of 40% for the federal government and 20% for the states.
• State-Level budgetary Reforms: By providing awards or incentives to states that uphold budgetary restraint, the federal government can encourage the adoption of responsible fiscal policies by the states and deter excessive borrowing.

Boost Revenue Further:

• Boost Tax Administration and Compliance: To raise more money for the government, boost tax administration and compliance. By using technology to cross-match income tax returns with GST returns, tax evasion can be reduced and tax collection efficiency increased.
• Streamlining the Administrative Process: Increase revenue by adopting new taxes and implementing them more effectively.
• Disinvestment and Effective Asset Management: To maximise public resources and lessen the need for excessive borrowing, pursue disinvestment and strategic asset management.

Realign Infrastructure and Capacity Building Spending:

• Infrastructure Investments: To increase economic productivity and promote sustainable growth, give priority to investments in physical infrastructure, human capital, and green initiatives.
• Privatisation of Public Sector Undertakings (PSUs) at Loss: As was the case with Air India, the government may consider privatising PSUs at Loss.
• PPP Model in Social Schemes: For initiatives such as Deen Dayal Upadhyay Grameen Kaushalya Yojna (DDU-GKY), the government may consider implementing a public-private partnership (PPP) model. This could contribute to lowering governmental debt.
• Describe Green Debt Swaps: Under a green debt swap, a debtor country and its creditors bargain to exchange or restructure current debt in a way that supports sustainable and ecologically friendly initiatives.
• It allows low-income nations to reinvest a portion of their debt repayment proceeds on health, education, environmental protection, and climate change initiatives. Debt swaps can help the world’s low-income nations avoid default if creditors agree.

Employ Institutional Frameworks:

• Leveraging the Public Financial Management System (PFMS): Making the most of the PFMS is essential to managing the fiscal deficit effectively since it increases accountability and transparency in public spending.
• Creation of the Public Debt Management Agency (PDMA): By centralising knowledge and duties associated with managing public debt, the PDMA will guarantee a targeted and specialised approach.
• This may result in more strategic planning and decision-making that is more successful in addressing the intricate issues of the nation’s public debt.

Way Forward:

• While the Finance Ministry brushes off IMF estimates as a “worst-case scenario” and says it’s not a done deal, India ought to work towards creating a transparent, prudent, and sustainable fiscal climate.