COVID-19 pandemic caused unprecedented economic crisis for India resulting in decline of government revenues as economic activity halted, however, government expenditure had to be stepped up to protect lives and livelihoods. This has increased general government debt to around 85% of GDP.
Government in the budget has called for an expansionary fiscal policy for sustainable long-term growth with fiscal deficit estimated to be 6.8%. This has raised concerns over sustainability of India’s debt.
REASONS FOR SUSTAINABILITY OF INDIA'S DEBT
- For India, GDP growth rates regularly were more than interest rates. The interest rate growth differential (IRGD) is expected to remain negative for India in foreseeable future.
- India's public debt to GDP has been significantly low compared to high global debt levels.
- Public debt for India has declined since 2003 and has been stable since 2011.
- External debt is only 2.7% of GDP thus low foreign exchange risk. India has fifth largest forex reserves.
- 70% of total public debt is with Central Government which is desirable.
- Public debt has long maturity profile tends to limit rollover risk and insulates debt portfolio from interest rate volatility.
COVID-19 pandemic has led to a demand shock. An expansionary and countercyclical fiscal policy during this time will help by:
- Multipliers of fiscal spending are disproportionately higher during economic crisis that economic booms
- Boost potential growth with public investment that raises productivity. Ex. Infrastructure
- When private sector is risk averse, public investment can lead to virtuous cycle of investment
Thus, India should pursue countercyclical fiscal policy and take up debt in times of crisis to boost economic growth in a sustainable manner.