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Informist, Friday, Oct. 25, 2024

 

NEW DELHI – The government's plan to target debt-to-GDP ratio as part of the fiscal consolidation strategy, instead of a fiscal deficit, could turn out to be fiscally expansionary, ICICI Bank said in a research report on Friday. Targeting debt-to-GDP will also support growth, the report said.

 

In the Union Budget for 2024-25 (Apr-Mar) in July, Finance Minister Nirmala Sitharaman had announced that the government plans to target debt-to-GDP ratio from FY27. The government will endeavour to "keep the fiscal deficit each year such that the central government debt will be on a declining path as a percentage of GDP," Sitharaman had said. After the COVID-19 pandemic, the government has aggressively lowered the fiscal deficit. It aims to bring down the fiscal deficit to 4.9% of GDP in FY25 from 5.6% in FY24. The government has set a target of lowering the fiscal deficit to below 4.5% of GDP in FY26.

 

According to economists at ICICI Bank, if the government reduces debt-to-GDP ratio by 100 basis points every year, it will fall below 50% of GDP by FY32 from 56.8% in FY25. Further, if the government continues to reduce the ratio by 50 bps every year, the debt-to-GDP will fall below 40% of GDP by FY52, ICICI Bank said.

 

"Lowering the debt-to-GDP by 1 percentage point (100 bps) every year will require lowering the fiscal deficit by a significantly lesser quantum," ICICI Bank said. "Hence, targeting debt-to-GDP ratio is likely to lead to a stronger-for-longer fiscal impulse compared to the fiscal deficit targeting regime."

 

If India's nominal GDP grows 10% every year, fiscal deficit is projected at 3.7% in FY40 and 3.2% in FY50. At 8% per annum nominal GDP growth, fiscal deficit is projected at 2.9% in FY40 and 2.6% in FY50, ICICI Bank said.

 

The projected debt reduction glide path is likely to lower India's debt-to-GDP to a level comparable with some peer countries over the medium term, ICICI Bank said. Ratings agencies have said that India needs to lower its debt burden and also the interest cost for a better sovereign rating. India is currently rated 'BBB-' by Fitch Ratings and S&P Global Ratings, and 'Baa3' by Moody's Ratings, the lowest rung of investment grade.

 

"The question that is being asked of us is what's it going to take for us to rethink our rating," Moody's Ratings Senior Vice President Christian de Guzman had told Informist in an interview in August. "It is improvements in the debt-to-GDP, and more importantly, improvements in debt affordability," de Guzman had said.

 

On the other hand, if the government continues to target fiscal deficit beyond FY26, it will lead to faster consolidation and lower level of debt-to-GDP ratio, ICICI Bank said. At 10% nominal GDP growth, if the fiscal deficit falls 50 bps every year to 3% by FY29 from 4.5% in FY26 and remains steady, debt-to-GDP will fall to 39.5% in FY40 and 35.5% in FY50, the report said.

 

"This shows that moving to debt-to-GDP ratio as the budgetary anchor would give government room to have a more flexible fiscal policy vis-a-vis targeting fiscal deficit," ICICI Bank said. "The former would also be more growth positive compared to the latter."  End

 

Reported by Shubham Rana

Edited by Ashish Shirke

 

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