RBI economists reject IMF view that India’s debt-GDP ratio may shoot up
Updated: Feb 21st, 2024
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| Source: IANS |
RBI economists, in a report released on Feb 20, rejected the IMF view that India’s debt-GDP ratio has the potential of shooting past 100% if historical shocks materialise and hence the country needs to cut government expenditure.
In an article in the RBI bulletin, the economists including RBI deputy governor Michael Patra said: “Our simulations reveal that the general government debt-GDP ratio swerves below the projected path set out by the IMF in its latest Article IV consultation report for India.”
With recalibration of government expenditure, the general government debt-GDP ratio is projected to decline to 73.4% by 2030-31, around 5% points lower than the IMF’s projected trajectory of 78.2%, according to an article.
This is noteworthy as the debt-GDP ratio is projected to rise from 112.1% in 2023 to 116.3% in 2028 for advanced economies and from 68.3% to 78.1% 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% of GDP in the medium-term and hence further fiscal tightening is needed,” the RBI economists observe.
Empirical findings show that medium-term complementarities between judicious fiscal consolidation and growth outweigh the short-run costs. Spending on social and physical infrastructure, climate mitigation, digitalisation and skilling the labour force can yield long-lasting growth dividends, the article points out.
“Using a dynamic stochastic general equilibrium model, we find that if government expenditure is directed towards the above-mentioned segments, the debt-GDP ratio of the general government can decline substantially to 73.4% of GDP by 2030-31,” the article reads.
The article also points out that the Interim Budget for 2024-25 places the gross fiscal deficit of the Union government at 5.1% of GDP in 2024-25, in line with the target of 4.5% of GDP by 2025-26.
“The impetus provided to capital expenditure in the post-pandemic period has been sustained by increasing its share to 3.4% of GDP,” it added.
(Source: IANS)
-Edited for style
