India is likely to witness sustained improvement in debt to GDP ratio over the medium term, driven by high economic growth rate and modest fiscal consolidation, says a Deutsche Bank report. The report titled Analysing India’s Debt Sustainability noted that the nominal GDP growth will surprise on the upside and in turn will help the country bring down the debt level.
“Our analysis reveals that high economic growth rate and modest fiscal consolidation could lead to sustained improvement in India’s debt-GDP ratio over the medium term,” Deutsche Bank Chief Economist Kaushik Das said in a note.
India has seen its public debt-GDP ratio decline significantly in recent decades — to about 70 per cent in 2016-17, from 84 per cent in 2005-06.
Despite the significant reduction in debt level, it is still high compared to its emerging market peers.
Only in the case of Brazil and Malaysia, the government’s gross debt level is as high as in India. China’s gross debt level for 2016 stood at 40 per cent of GDP.
An analysis of the liability position of the Centre and states showed that a majority of the debt reduction has come at the central government level.
While the central government debt as a percentage of GDP fell to around 50.3 per cent in 2015-16 from 61.5 per cent in 2004-05, the state metric fell to 21.4 per cent from 26.3 per cent, the report said.
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Meanwhile, the Fiscal Responsibility and Budget Management (FRBM) Committee has recommended the central government continue on the path of fiscal consolidation, with medium-term goal of bringing the Centre’s fiscal deficit down to 2.5 per cent of GDP by 2022-23.
The committee also recommended a desirable fiscal path for state governments so that cumulatively debt-GDP of states can remain constant at about the current level of 21% throughout the forecast period.
“This would require state fiscal deficit to come down by about 1 per cent of GDP to 2 per cent by 2022-23. If this is achieved, India’s overall public debt-GDP ratio would moderate to about 60 per cent of GDP by 2022-23, a 10 per cent drop from the current levels,” the report stated.