RBI economists reject IMF view that India’s debt-GDP ratio may shoot up

RBI Disagrees with IMF’s View on India’s Debt-GDP Ratio

RBI economists released a report rejecting the IMF’s view that India’s debt-GDP ratio could exceed 100% if historical shocks materialize. They stated that the country does not need to cut government expenditure. The article in the RBI bulletin stated, “Our simulations reveal that the general government debt-GDP ratio swerves below the projected path set out by the IMF.”

According to the report, the general government debt-GDP ratio is projected to decline to 73.4% by 2030-31, which is 5 percentage points lower than the IMF’s projection of 78.2%. This comes as the debt-GDP ratio for advanced economies is projected to rise from 112.1% in 2023 to 116.3% in 2028, and from 68.3% to 78.1% for emerging and middle-income countries.

The RBI economists rejected the IMF’s contention that India’s general government debt would exceed 100% of GDP in the medium-term. They emphasized that judicious fiscal consolidation and growth outweigh the short-run costs. The article also highlighted the importance of spending on social and physical infrastructure, climate mitigation, digitalization, and skilling the labor force for long-lasting growth dividends.

Furthermore, the article pointed out that the Interim Budget for 2024-25 places the gross fiscal deficit of the Union government at 5.1% of GDP in 2024-25, in line with the target of 4.5% of GDP by 2025-26. It also noted that the impetus provided to capital expenditure in the post-pandemic period has been sustained by increasing its share to 3.4% of GDP.

The report by RBI economists provides a contrasting view to the IMF’s projection, highlighting the potential impact of recalibration of government expenditure on India’s debt-GDP ratio. The findings emphasize the need for targeted government spending on key sectors to drive long-term growth and fiscal consolidation, thereby challenging the notion of immediate fiscal tightening.