India’s government debt to remain high in the years to come
- 27 Aug 2020
India’s general government debt is likely to remain high in the years to come and will significantly impact the government’s ability to spend in the upcoming decade, according to a report by Motilal Oswal Financial Services.
The EcoScope report said that India’s general government debt, or the overall debt of the Centeal and the state governments, is expected to reach 91 per cent of GDP in the current fiscal and is likely to stay above 90 per cent of the GDP till FY23.
It added that after FY23, the general government debt levels will moderate to 80 per cent by FY30. The general government debt rose to 75 per cent of GDP in FY20 from 70 per cent in FY18.
“This surge in India’s government debt-to-GDP ratio would restrict its ability to grow its spending significantly and support economic activity in the 2020s decade, as it has done in the past few years,” it said.
While real GDP growth averaged at 6.8 per cent between FY14 and FY20, real fiscal spending grew at an average of 9 per cent during the period. In FY20, while real GDP growth weakened to 4.2 per cent, fiscal spending is estimated to have contributed 1.1 percentage points or 27 per cent to annual real GDP growth.
The study noted that if primary spending growth eases to 7.3 per cent over the next decade from 11.3 per cent in the past decade, it becomes apparent that the government would be unable to grow its investments (capital outlays) at the same pace as in the past decade.
“Since a large part of non-interest revenue spending (such as defence, salary & wages, pensions etc) is fixed or non-discretionary in nature, there is a high possibility fiscal investment would grow at an even slower rate in the 2020s decade,” the report said.
Either the government would have to rationalise its spending or the idea of government investments growing decently in the 2020s decade would remain a distant dream, it added.
Meanwhile Reuters report said that the Indian government consumption will support current economic demand while private consumption is likely to lead a recovery that takes hold after the coronavirus pandemic eases, the central bank said on Tuesday.
June-quarter GDP data set to be released at the end of August is expected to show a contraction of 20 per cent, according to a Reuters poll.
“An assessment of aggregate demand during the year so far suggests that the shock to consumption is severe, and it will take quite some time to mend and regain the pre-COVID-19 momentum,” the Reserve Bank of India (RBI) said in its annual report.
“Going forward, government consumption is expected to continue pandemic-proofing of demand.”
Private consumption will come back gradually with non-discretionary spending leading the way, until a durable increase in disposable incomes enables discretionary spending to catch up, the bank added.
“The upticks that became visible in May and June after the lockdown was eased in several parts of the country appear to have lost strength in July and August,” the bank said.
This weakening was mainly due to reimposition or tougher imposition of lockdowns, suggesting that contraction in economic activity was likely to be prolonged into the second quarter, it added.
Key downside risks to growth are wider pandemic spread, a deviation of seasonal monsoon rains from the predicted normal volume and global financial market volatility, the bank said.
It called for the banking sector to be freed of a risk aversion that is impeding the flow of credit to productive sectors and undermining banks’ role in the economy.
Despite a reduction in bad loans in March 2020, the banking system’s resilience will be tested by the economic fallout of the pandemic, since measures to alleviate it had masked the consequent build-up of stress in the system, the bank said.
“Against this backdrop, a recapitalisation plan for public and private sector banks assumes critical importance,” it added.
In a separate report, the RBI had warned that banks’ bad loans could nearly double by the end of this fiscal year, while the capital adequacy ratio could fall to 11.8 per cent in a severely stressed situation. The RBI’s balance sheet increased 30.02 per cent by June 30, it added. India’s rupee pulled back slightly on Tuesday after surging as much as 1 per cent a day earlier on reports of a halt in central bank intervention aimed at keeping a lid on gains for the currency to support a struggling economy.
Agencies
