The Economy Observer
25 August 2020
India’s government debt likely to stand at 80% of GDP by FY30
Fiscal support to GDP growth to be lower in 2020s decade
During the past six years, fiscal spending (consumption + investments) has been one of the key drivers of economic
activity. While real GDP growth averaged at 6.8% between FY14 and FY20, real fiscal spending grew at an average of 9%
during the period. In FY20, while real GDP growth weakened to 4.2%, fiscal spending is estimated to have contributed 1.1
percentage point (pp) or 27% to annual real GDP growth. During the past three years, government spending has
contributed almost a quarter to annual real GDP growth.
The COVID-19 pandemic, however, has hurt the government’s ability to continue to do so over the next decade. Our
estimates suggest India’s general government (center + states) debt rose to 75% of GDP in FY20 from 70% in FY18. It is
likely to reach 91% of GDP in FY21 (the highest level since 1980 – since the availability of data) and stay at >90% of GDP
up to FY23. This surge in India’s government debt-to-GDP ratio would restrict its ability to grow its spending significantly
and support economic activity in the 2020s decade, as it has done in the past few years.
Gradual fiscal consolidation (to lower India’s government debt-to-GDP to ~80% of GDP by FY30) implies primary spending
interest payments) by the general government is likely to grow at an average of 7.1% in the 2020s decade v/s
average growth of 11.3% in the 2010s decade. The faster the fiscal consolidation, the lower the government debt, but the
slower the growth in fiscal spending (and vice-versa).
Moreover, if primary spending growth eases to 7.3% over the next decade from 11.3% in the past decade, it becomes
apparent that the government would be unable to grow its investments (capital outlays) at the same pace as in the past
decade. Since a large part of non-interest revenue spending (such as defense, salary & wages, pensions etc.) is fixed or
non-discretionary in nature, there is a high possibility fiscal investments would grow at an even slower rate in the 2020s
decade. Either the government would have to rationalize its spending or the idea of government investments growing
decently in the 2020s decade would remain a distant dream.
Importantly, since we expect India’s nominal GDP growth to average at 9% over the next decade, higher than the average
effective interest rate of 6.9%, there is no fear of debt unsustainability. Nevertheless, the gap between growth and
interest rate (at 2pp) would be the lowest in the past five decades and less than half of 4–5pp each in the past two
decades. This means the amount of primary surplus required to lower the debt-to-GDP ratio faster would be higher. This
would have the potential to hurt real GDP growth further, creating a vicious circle, which would eventually make it more
difficult to bring down the debt-to-GDP ratio, as planned.
Overall, there are five important conclusions. 1) India’s general government debt-to-GDP ratio is likely to be at ~80% of
GDP by FY30 and unlikely to fall to the 60% target even by FY40 without hurting GDP growth more seriously. 2)
Government support to real GDP growth in the 2020s decade would be lower than in the past few years. 3) Fiscal
investments are likely to grow at an even slower pace since a large part of non-interest revenue spending is non-
discretionary. 4) Although the government debt-to-GDP ratio is expected to remain high, there is no fear of debt
unsustainability (or debt spiraling out of control). 5) Unless private spending picks up strongly, real GDP growth over the
next decade would be slower, such as 5–6% v/s 7% in the 2010s decade.
Among these issues, one really wonders about the Government of India (GoI)’s ability to implement a large fiscal
stimulus. However, this does not imply that there should be no fiscal support. As we had discussed in detail
needs to support only those vulnerable sections that are the worst affected, and this would not cost the government
more than 2% of GDP.
Nikhil Gupta – Research Analyst
– Research Analyst
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