Positive outlook – High public debt remains a risk

Source: The post is based on the article “Positive outlook – High public debt remains a risk” published in “Business Standard” on 22^nd December 2023.

UPSC Syllabus Topic: GS Paper 3 – Economy – Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.

News: The International Monetary Fund (IMF) has recently released ‘Article IV Consultation Report’. The report provides positive outlook for the Indian economy, raises some concerns and provide recommendations.

For a detailed reading on the IMF report: Click Here

What are the positive findings of the report on India’s economy?

India has shown strong growth in the last year, despite global challenges.

This has been due to the resilience of India’s financial sector characterized by low non-performing assets, an increase in domestic credit, and adequate capital and liquidity buffers.

What are some of the concerns highlighted by the report?

High Public Debt: The report raises concerns about high public debt levels projected to reach 82.3% of GDP by 2024-25. This has been mainly due to pandemic relief efforts. This poses a risk to both growth and financial stability.

Moreover, additional investments needed to achieve India’s net-zero target by 2070 could further increase public debt.

RBI’s Frequent Interventions: The IMF has highlighted concerns about the RBI’s frequent interventions in the currency market. It suggested that the rupee’s stable trading range indicates a “stabilized arrangement” rather than a “floating” exchange rate.

However, the RBI has stated that its policy avoids targeting specific exchange rate levels and intervenes only to control excessive volatility.

What recommendations have been provided by the IMF in its report?

Fiscal Reforms: The IMF recommends reviewing the Fiscal Responsibility and Budget Management Act and implementing a medium-term fiscal framework (MTFF) to manage debt and rebuild buffers.

In this regard, balancing public investment for growth with overall fiscal sustainability will be crucial.

Adequate Foreign Exchange Reserves: Adequate foreign exchange reserves have proven crucial in preventing pressure on the rupee during global interest rate hikes in 2022.

Hence, the IMF has emphasized that it is important for the RBI to maintain adequate foreign exchange reserves.

Question for Practice: India is experiencing high public debt and it is expected to increase in the future. Evaluate the necessary measures that India should adopt to tackle this growing concern.