Mumbai (Maharashtra) [India], Aug 26 (ANI): The government’s debt rose to 75 per cent of GDP in FY20 from 70 per cent in FY18 and is likely to reach 91 per cent in FY21, according to estimates from the EcoScope report of Motilal Oswal Financial Services.
It will stay at more than 90 per cent up to FY23 before moderating slowly to 80 per cent by FY30. This surge in government debt-to-GDP ratio will 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, said the report released on Wednesday. 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 point or 27 per cent to annual real GDP growth.
The study cites 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 will 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 and wages, pensions) is fixed or non-discretionary in nature, there is a high possibility fiscal investment will grow at an even slower rate in the 2020s decade.
“Either the government will have to rationalise its spending or the idea of government investments growing decently in the 2020s decade will remain a distant dream,” said the study.
Importantly, since India’s nominal GDP growth is expected to average at 9 per cent over the next decade, higher than the average effective interest rate of 6.9 per cent, there is no fear of debt unsustainability.
Nevertheless, the gap between growth and interest rate (at 2 percentage point) will be the lowest in the past five decades and less than half of 4 to 5 percentage point each in the past two decades. This means the amount of primary surplus required to lower the debt-to-GDP ratio faster will be higher.
“This will have the potential to hurt real GDP growth further, creating a vicious circle, which will eventually make it more difficult to bring down the debt-to-GDP ratio as planned.”
The reported issues do not imply that there should be no fiscal support. The government needs to stimulate only those vulnerable sections that are the worst affected, and this will not cost the government more than 2 per cent of GDP. (ANI)