India has a high debt like that of China but the risks associated with it are not as great as that of its northern neighbour, a senior official from the International Monetary Fund has said, advising India in the medium term to have an ambitious fiscal consolidation plan that brings down deficits.
“The current debt in India is also high. It stands at 81.9% of GDP. Compared to China, which is 83%, it is very similar. Also, when we compare India’s debt to the pre-pandemic level in 2019, it was 75%. So it is still quite a bit higher,” Ruud de Mooij, Deputy Director, Fiscal Affairs Department at International Monetary Fund, told PTI in an interview.
“What we also see in India is a deficit that is 8.8 per cent projected for 2023. In India, a large portion of this is because of expenditures on interest. They pay a lot of interest on their debt: 5.4% of GDP is spent on that, and the primary deficit is 3.45. So together they add up to 8.8%,” he said.
Responding to a question, Mooij said that India’s debt is not projected to rise like in China. It, in fact, is projected to fall slightly by 1.5 per cent to 80.4 per cent in 2028.
One of the reasons is that growth in India is much higher. India is one of the countries with really high growth. This matters of course for the debt to GDP ratio. Also, just to note that the risks are moderated by some factors, he said.
“One factor is, for instance, the long maturities of the debt. They don’t need to be renewed very frequently. This matters for the gross financing needs. And also, in India we see a large domestic domestically held debts and also denoted in domestic currency. So these mute the risks associated with the debts,” he said.
The risk factor in India is the state level risks, he observed. “Some states really have high debts, have high financing needs and face a high interest burden. This is a factor that does mean that there are significant risks also for India,” he said.
“What should India do? Well, the policy advice is for the medium term to have an ambitious fiscal consolidation plan that brings down the deficits, especially the primary deficits through a range of measures. It could be on the revenue side, could be on the spending side, and it could also be on fiscal management, sort of using good fiscal rules, fiscal frameworks to manage the fiscal equation going forward. That is the overall advice that we would recommend,” Mooij said.
The debt level is projected to be rather stable at 80 per cent. “What we would recommend is at least a decreasing path of debt, because what we see is that interest expenditures are 5.4 per cent of GDP,” he said.
Mooij said one of the ways in which India could usefully support fiscal consolidation is by strengthening the tech system. There are several opportunities here. There are opportunities in the general sales tax, which has multiple rates, many exemptions, and maybe not all of them are effective.
Improving the design of the general sales tax could contribute to this. We also see opportunities for broadening the base of the personal income tax and the corporate income tax where there are many loopholes that can often be addressed, he said.
“For instance, there’s the fuel tax cuts that could be reversed. On the revenue side, and several options on the spending side, we think it’s important to prioritize public investments as India has been doing. There’s important gains, especially with the current growth from investing in public infrastructure, but also investment in education, healthcare and maybe less priority for spending that is less efficient,” he added.
“For instance, certain subsidies may be provided too much across the board and support to households could be better targeted to those who really need it. In many areas, we think there’s opportunities for improving spending efficiency, so reducing waste,” he said.
The management of the fiscal policies could be improved, the IMF official said. “For instance, public financial management could sometimes be made more transparent. We are working also with India on these issues, sharing best practices from other countries. The management of fiscal policy could benefit from a strong fiscal framework with an independent institution that advises on fiscal policy with clear fiscal rules that commit the government to certain objectives.
“There is a lot of good experience with these kinds of fiscal frameworks in achieving results for the fiscal equation,” Mooij said.