Customary to its age-old multilateral convention, the International Monetary Fund (IMF) while cautiously lauding the reformist zeal engulfing the state of the Indian economy, sounded its usual scepticism over the likelihood of the debt-to-GDP traversing the dreaded 100 percentage mark in the not-so-distant future.
At 82 per cent, even as it appears futile to invite naysayers’ wrath, the quality of debt demands unmistakable attention. From a broader perspective, it is worth reminiscing about the inexorable need to view debt from the prism of development. Interestingly, the percentage of debt earmarked for servicing (interest payments) is comparatively low to the debt driven into capex-boosting investment with multiplier gains on the economy.
Several other factors must be taken into cognisance while categorising debt as inherently good or bad. First, even the most vocal detractors will derive solace from the prevailing dual stability evident on monetary and fiscal fronts. On the former, interest rates remain well below the 6 per cent limit even as inflation doesn’t seem to have rung alarm bells, at least until now — notwithstanding the global clamour for an interventionist approach in many countries.
India’s fiscal deficit too remains well guarded below the targeted 6 per cent mark with final FY figures throwing some room for a positive surprise on the back of lower import bills and contracting current account deficits.
Second, ardent vocalists harping on the safety of Indian debt due to domestic denomination are missing the wood for the tree. The redundancy of the argument is traceable to inherent risks evolving from the ‘crowding-out effect’ making debt costlier for the private sector.
However, it is noteworthy to gauge that Union government debt is predominantly directed towards big-ticket infrastructure projects routed via the PSUs. Here, both from an appetite as well as an aspirational perspective, interest from the private sector (with some exceptions) is limited. In the absence of an efficient bond market, it is the government which remains the predominant player with the private sector relying through a tripod of internal reserves, bank loans, and equity to finance investments. It is imperative to distinguish between bank loans and bonds as the former is secured by a collateralised asset while the latter is largely dependent on the credit backing of the sovereign.
Bonds bring us to an important point relating to the relative strength of India’s sovereign evident in credit rating. Despite the noises surrounding the politics and economics of credit rating agencies (CRAs), it is noteworthy to observe all the major CRAs assigning ‘Investment Grade’ espousing safety in the sovereign debt even as economic pundits vie a strong case for an upward revision. This itself is good concerning the turmoil seen elsewhere with a downgrade afforded to both the United States and China for different reasons with some fundamental concerns raised with peculiar factors traceable to the world’s two biggest economies.
As long as debt is devolved into development goals churning incomes through investments at economies of scale, apprehensions surrounding traversing the triple-digit on debt-to-GDP are best ignored. Even if cynics were to cough at the combined levels of central and state-level debt, the federated structure permits a complex amalgamation of interventionist and market-dynamics to avoid large-scale spill-over with an unlikely provision of a single fish polluting the lake.
Most Indian states realise the limits to fiscal profligacy (with some exceptions) despite feverish electoral rhetoric with scant respect for State coffers. In this respect, State-level debt burdens remain skewed with favourable scenes on the western and southern front with some targeted hand-holding needed by the Union government in putting the balance sheets of the states in the eastern region in order.
By extrapolation, 2024 promises to be an exciting year for India as foreign investors continue to see India as a bastion of geopolitical and economic oasis with democratic dividends outpacing demographic dividends. By extension, it is not inconceivable to see India’s capital markets set to reap windfall gains with quality foreign institutional investors making the dent. The government on its part should be alert in seizing the market momentum to realise the previously missed disinvestment targets towards cushioning the fiscal position. The internationalisation efforts embarked upon with palpable enthusiasm should create more traction for international trade in the rupee, even as significant work remains to be done before challenging the world’s pre-eminent reserve currencies.
The Reserve Bank of India (RBI) would do well to continue bolstering its foreign reserves lending a significant safety net to traverse economic disturbances successfully. Finally, on the back of India’s unrivalled digital public infrastructure, 2024 should be seen as a watershed moment in realising India’s biggest financial inclusion goal, both in quantity and quality with tangible economic outcomes percolating the last mile with every member of the household as a beneficiary.
(Ullas Rao is a West Asia-based financial economist and researcher. X: @Ullasrao7.)
Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.