As the global economy begins stabilising after the pandemic-led disruption, the focus is shifting to the debt accumulated by the countries to fight the slowdown. IMF’s fiscal monitor for 2024 has gone to great lengths to highlight the need to bring the burgeoning sovereign debt under control. Its projection of global public debt exceeding $100 trillion or 93 per cent of global GDP in 2024 and 100 per cent of GDP by 2030, is disconcerting. Although the report says that public debt is projected to grow higher in only one-third of the countries, this list notably includes the US, China, Brazil, France and the UK. As the largest economies grow their debt pile, it will have serious implications for sovereign bond yields and cost of finance of all emerging economies, including India.
The situation in India is far from comfortable. General government gross debt at 83.1 per cent of GDP is higher than the average for Asian countries at 83.8 per cent of GDP and for G20 countries’ average of 75.8 per cent of GDP. Though India’s debt is projected to reduce from 2025, it will decline at a very gradual pace, to reach 78.4 per cent of GDP by 2029. However, the Centre is cognizant of this risk. A shift in stance was indicated during the Budget this year, from targeting a lower fiscal deficit to getting the debt to GDP ratio under control. But, as the fiscal monitor points out, “in most countries, fiscal adjustments currently in the pipeline are insufficient to deliver, with confidence, stable or declining public debt ratios. Additional efforts are necessary.” Efforts to bring down public debt are impeded by the impossible trilemma facing governments. This involves – one, the pressure to spend more to support growth, two, the political resistance to increase in taxes and three, the objective to have sustainable debt along with macroeconomic stability. If governments spend on capital investments without increasing revenue, public debt will continue to rise.
It is imperative for the Centre to look for additional means to augment its revenue by broadening the tax base, improving tax administration and increasing formalisation of the economy. Similarly, expenditure also needs to be reined in. While the debt level of the Centre could move lower in the coming years, checking the borrowing of States will be far more challenging. Nudging States to increase their own tax revenues and to reduce subsidies will run into far more political resistance. But States need to get fiscally prudent, if the overall fiscal balance and government debt has to be controlled.
The fiscal monitor also makes valid points about the risks posed by unidentified public debt. These debts include losses of state-owned enterprises, loan guarantees, extra-budgetary spending and other contingent liabilities. The Centre has sought to recognise a large part of such unidentified debt. But States have been relatively tardy in this respect. This is a subject matter for the sixteenth Finance Commission.