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India's high debt-to-GDP ratio acceptable in times of Covid, say analysts

A number of economists, experts and agencies have warned that India’s debt-GDP (gross domestic product) ratio could rise up to as high as 90 per cent in 2020-21, with the Centre and states borrowing more than budgeted as a revenue crunch sets in. This compares to the existing levels of nearly 70 per cent, and the Fiscal Responsibility and Budget Management Act’s medium-term stated target of 60 per cent.

However, some of the same experts say that at a time of deep global slowdown due to the Covid-19 pandemic, and the eight-week nationwide lockdown in India – which is gradually being lifted –  it is acceptable for the states and the Centre to keep aside the FRBM targets, as long as they have a clear road map on what the extra borrowing will be spent on, and on how they plan to return to a path of fiscal consolidation.

It should be remembered that debt-GDP in this context means the general government debt of Central and states combined.

The FRBM Act, as per the recommendations of the FRBM committee, mandates a medium-term target of debt-ratio at 60 per cent of GDP, with 40 per cent the centre’s debt-GDP ratio at 40 per cent, and that of the states at 20 per cent.

For 2019-20, the general government debt-GDP ratio was a little more than 69 per cent, out of which some 49 per cent was that of the centre. In fact, this has been the case for some years now, as states have mostly been within the FRBM-mandated fiscal deficit target of 3 per cent and debt-GDP ratio of 20 per cent, while the centre has breached these targets year after year.

This year however, the Centre has increased its gross borrowing target by Rs 4.2 trillion to Rs 12 trillion. Finance Minister Nirmala Sitharaman has also allowed states to borrow up to 5 per cent of GSDP from 3 per cent earlier, under certain conditions. This will allow states an extra borrowing room of about Rs 4.3 trillion.

Global ratings agency Fitch, which last week India’s long term sovereign rating outlook, said it expects general government debt to jump to 84.5 per cent of GDP in FY21 from an estimated 71 per cent in FY20, while Moody’s expects it to go upto as high as 90 per cent. Moody’s cut India’s sovereign rating earlier this month.

Former Chief Economic Advisor Arvind Subramanian also recently said that India’s general government deficit could go into double digits and debt-GDP ratio may rise to 85 per cent.

The United States’ debt-GDP ratio was at 106 per cent of GDP in 2018, though it came down in 2019. Japan’s debt to GDP ratio was at a staggering 235 per cent in 2017, while China’s debt-GDP hit 317 per cent of GDP in January-March 2020, as per a report in South China Morning Post.

However, it is unclear what is the composition of these numbers in terms of central debt, debt of states or provinces, or household debt. Hence it is imprudent to compare thes

Experts say that India’s general debt reaching levels of above 80 per cent of GDP would be acceptable, and in fact, cannot be avoided at a time when centre and states are expected to witness huge revenue shortfall compared to earlier projections.

N K Singh, the chairman of the Fifteenth Finance Commission (he also headed the FRBM committee), said this month that in light of increased spending commitments due to Covid-19, the centre and states can breach their FRBM limits, but need to have a clear path to come back fiscal sustainability after the pandemic has been dealt with.

“Each state will have to examine what is contained in their own FRBM Acts. Quite a few states have the 0.5 per cent escape clauses. These targets can be flexibly breached, provided there is a commitment to come back. For the centre, an amendment may not be required. All that has to be done at some stage, is for the Finance Minister to present a road map to come back to a sustainable fiscal path,” he said.

National Institute of Public Finance and Policy’s Rathin Roy, who was Singh’s colleague in the FRBM panel, told Business Standard earlier this week that the FRBM conditions can be kept aside but need to be monitored. “With this crisis, the big question of public finance is that can public resources be used more effectively and efficiently to achieve better outcomes than they have been used for the past 40 years,” he said, adding that whatever extra is being borrowed needs to have a clear outcome plan. 
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