Heed, don’t dismiss, IMF’s debt warning

Geopolitical issues like the Russia-Ukraine war did not have a major impact on the Indian economy. It has made a more optimistic projection of growth in the medium term, raising it to 6.3% from 6%.

The International Monetary Fund’s recent consultation paper on India has painted a positive picture of the country’s economy in important respects but has raised some red flags also. It has noted that India was able to register robust growth when the global economy faced many challenges and most economies slowed down.

Geopolitical issues like the Russia-Ukraine war did not have a major impact on the Indian economy. It has made a more optimistic projection of growth in the medium term, raising it to 6.3 per cent from 6 per cent.

This is when global growth is projected to fall from an estimated 3.5 per cent to 3 per cent. The IMF also commended India’s inflation management, done by both the Reserve Bank of India (RBI) and the government. It has acknowledged that the financial sector had enough resilience, as seen by the low levels of non-performing assets in the banking sector and increasing credit flow in the economy.  

But the report has expressed serious concern over the high level of public debt and the risks that it may pose to growth and financial stability.

There was a sharp increase in public debt, caused by the disruptions during the pandemic period.

The paper expects India’s public debt to rise to 82.3 per cent of the GDP in 2024-25 and to remain at around 80 per cent till 2028. While even these levels are high, there may even be the risk of the debt rising to 100 per cent of GDP if situations emerge that will demand more public investment and spending.

Such situations may arise, for example, if more climate-related spending and investments are needed in future. Inflationary pressures and further food export restrictions could pose threats. “A sharp global growth slowdown in the near term would affect India through trade and financial channels. Further, global supply disruptions could cause recurrent commodity price volatility, increasing fiscal pressures for India,” it said.

It has suggested a review of the Fiscal Responsibility Act and implementation of a Medium Term Fiscal Framework (MTFF) to cope with such scenarios. It has also expressed concern over the RBI’s foreign exchange interventions, which have impacted the exchange rate. It has reclassified the country’s exchange rate regime as a “stabilised arrangement” instead of “floating”.

The concerns have been dismissed as misplaced and unreal by the government and the RBI. The RBI has said that the IMF assessment is based on selective data and that a longer term view would show that it is not correct. The government has said that the projections about debt are “misconstrued” and several other countries, including the US and China, are expected to perform worse than India. But the warnings need to be heeded, and denials will not help.