The Finance Ministry’s claim is certainly valid but it is also a fact that India’s debt has been increasing in recent years and there is need to get back to serious fiscal consolidation. In fact Finance Ministry has admitted in its statement that India’s debt, which was around 82.9 per cent of GDP in 2002, had come down to 66.4 per cent of GDP in 2010 during Manmohan Singh era. It went up to 70.4 per cent in 2018 and from thereon to 81 per cent of GDP. The government may claim 81 per cent is still less than 82.9 per cent of GDP in 2002, but fact of the matter is that the debt has gone up around 15 per cent during Modi era, which is a matter of concern. Finance Minister Nirmala Sitharaman herself has flagged the issue of high debt recently. It may be true that some other countries Japan, Singapore, US, Sri Lanka, France and UK, have performed badly when compared to India. Their debt is already beyond 100 per cent of GDP and in case of Japan it was as high as 260 per cent of GDP in 2022. This is no solace.

Of course Nirmala Sitharaman has done reasonably well on debt management despite difficult economic situation arising out of Covid. But the fact remains that steady increase in debt from 66 per cent of GDP in 2010 is a matter of concern. There may not have been fiscal profligacy as in some of the advance economies during Covid but it is also a fact that Sitharaman had very little headroom to manage Covid through high debt. Take the case of China where the debt was just 25.9 per cent of GDP in 2002. It went up to 33.9 per cent of GDP in 2010 and 56.7 per cent in 2018 and 77 per cent in 2022.

Next month’s budget is certainly an interim one because of the general elections in April-May this year. But Sitharaman will certainly not be able to overlook the problem of mounting debt problem and may need some drastic steps to bring debt down to targeted 70 per cent of GDP in the medium-term.

IMF’s warning that government’s debt could be 100 per cent of GDP under adverse shocks by FY2028 cannot be taken lightly. It may be the worst case scenario, but it is certainly rings alarm bells for India to get back to fiscal consolidation path rapidly.

While acknowledging that India’s debt composition helps mitigate debt sustainability risks, IMF directors recommended ambitious medium-term consolidation efforts given elevated public debt levels and contingent liability risks. In that context, improving revenue mobilization and spending efficiency would allow for continued improvements in digital and physical infrastructure and targeted social support. IMF also encouraged the authorities to put in place a sound medium-term fiscal framework to promote transparency and accountability and align policies with India’s development goals.

The government should realise that one of the reasons for high debt is partly due to falling savings rate from a high of 36 per cent of GDP during Manmohan Singh era to as low as 27 per cent of GDP in recent years. This has forced the government to borrow more for capital expenditure.

There is also widespread criticism of both states and centre for indulging in populism to serve their respective political ends. Ahead of the constitution of 16th Finance Commission with noted economist Arvind Panagariya as its head, to recommend devolution of central taxes and grants to states, Reserve Bank of India has red-flagged the issue of states reverting to the old pension scheme and unsustainable subsidies flowing from guarantees or freebies promised at the time of elections, regardless of the financial condition of states. The new finance commission is expected to be asked to look into this worrying aspect. Many states have deficits because of subsidies for populist measures like free electricity and so on. The centre too is no better as its subsidy bill too is mounting year after year. Covid is used as one excuse.

An assessment of the FY22 finance accounts of all states show that states spend 0.87 per cent of the GSDP on an average on subsidies, but a few states spent much more like Punjab, 2.35 per cent, Rajasthan, 1.92 per cent, Madhya Pradesh, 1.69 per cent Chhattisgarh, 1.62 per cent and Jharkhand 1.58 per cent. The Reserve bank has rightly argued in its report on state finances that the finance commission should consider higher share of conditional transfer to states based on reforms, quality of expenditure and fiscal sustainability. Populism of a particular state cannot be financed by taxpayers of other states.

There is also merit in looking at PLI scheme, which subsidises Indian economy is surely in a bright spot and perhaps doing better than several other major economies, but this does not diminish in any way the concern of mounting debt, which needed to be reigned-in to restore the economic health. (IPA Service)