IMF sounds alarm on India's rising debt, warns of exceeding 100pc of GDP 

The International Monetary Fund (IMF) has issued a cautionary note, warning that India's general government debt could surpass 100 per cent of the gross domestic product (GDP) in the medium term, the Business Standard reported. 

This alert, highlighted in the annual Article IV consultation report, emphasises the need for new financing sources, greater private sector investment, and climate-resilience measures. The IMF points out that substantial investment is required to enhance India's capacity to withstand climate stresses and natural disasters. 

Government's Response and Disagreement  

In response, the Indian government has asserted that sovereign debt risks are limited as it is primarily denominated in domestic currency. K.V. Subramanian, India's executive director at the IMF, challenged the IMF's claim, stating that despite historical shocks, India's public debt-to-GDP ratio has shown minimal fluctuations. The disagreement centres on the IMF's reclassification of India's exchange rate regime to a "stabilised arrangement".

IMF's Optimistic Outlook and Fiscal Consolidation 

Despite the debt concerns, the IMF offers an optimistic outlook for India's economy in its Article IV report, projecting the potential for faster growth if key structural reforms are implemented. The report stresses the necessity for "ambitious" fiscal consolidation to curb public debt. It also outlines potential challenges, including global growth slowdown, commodity price volatility, and domestic weather shocks. The IMF underscored the impact of consumer demand and private investment on growth. 

Steps to Tackle Public Debt 

In October 2023, Finance Minister Nirmala Sitharaman revealed the government's commitment to exploring measures to reduce government debt. According to a report by Mint, the central government's debt, as of March 2023, stood at Rs 155.6 trillion, constituting 57.1 per cent of GDP. India faces challenges in enhancing credit ratings due to elevated debt levels and the heavy cost associated with servicing that debt. Despite being considered a 'bright spot' in the global economy, India grapples with challenges affecting sovereign investment ratings. 

Challenges and the Rating Agencies' Perspective 

The Economic Times reported that global rating agencies, including Fitch, S&P, and Moody's, have accorded India the lowest investment-grade rating, citing concerns over weak fiscal performance, burdensome debt stock, and low GDP per capita. The 'K-shaped' growth phenomenon, exacerbated by the Covid-19 pandemic, has contributed to uneven income distribution, impacting India's sovereign rating. Experts contend that the quality of government expenditure improvement could positively influence economic growth. 

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