India’s debt-GDP ratio to fall steadily, says ministry paper

The Indian government's debt liability as a percentage of the gross domestic product (GDP) is likely to fall in the coming years to touch 42.3 per cent by 2015-16 from 45.9 per cent last year, as the ongoing fiscal consolidation process will give stability to the economy.

With the government's medium-term fiscal consolidation plan targeting to curb the fiscal deficit to 3 per cent by 2016-17 from 4.9 per cent last fiscal, the debt-GDP ratio of the central government is expected to decline in the coming years.

The debt-GDP ratio is projected to decline from 45.9 per cent in 2012-13 to 45.7 per cent in 2013-14, to 44.3 per cent in 2014-15, and to 42.3 per cent in 2015-16, the Government Debt status paper said, the finance ministry said in a report on Tuesday.

The government drive for lowering the debt burden is slightly slower than what the Kelkar Committee proposed last year. It had proposed drastic reforms to lower the debt-GDP ratio to 42.9 per cent by 2014-15.

The combined debt of the union and state governments, which went up consistently during the 1980s and 1990s to touch a peak of 83.3 per cent in 2003-04, stood at 66 per cent at end-March 2013 compared to 65.5 per cent at end-March 2012.

"Reduction in debt took place both at central and state levels," the report said, adding the ratio stood at 46.7 per cent for the central government and 22.2 per cent for the state governments.

The ratio of interest payments to revenue receipts (IP / RR), another barometer for debt sustainability, shows a secular decline for both the central and state governments despite a marginal increase in recent years due to increased borrowing requirements after the financial crisis of 2008-09.

The centre's IP / RR declined to 36.3 per cent in 2012-13 compared with 37.5 per cent in 2009-10 and 53.4 per cent in 2001-02. Similarly, states' IP / RR ratio fell to 12.2 per cent in 2011-12 from 24.7 per cent in 2001-02.

The combined IP / RR of the centre and states in 2012-13 was at 23.1 per cent compared to 37.2 per cent in 2001-02. The average interest cost, measured in terms of interest payments during a year divided by average debt stock, is also falling continuously, which augurs well for the stability of government debt.

The centre's average interest cost declined to 6.4 per cent in 2012-13 from 8.1 per cent in 2000-01, while that for states fell to 7.3 per cent from 9.2 per cent.

Importantly, the nominal GDP growth has been well above the average interest cost, implying that the growth in revenue generation through GDP is likely to exceed the growth in interest obligations.

"This is likely to further push down the IP/RR ratio providing more fiscal space for developmental expenditure," the report said.

"India's government debt portfolio is characterized by favourable sustainability indicators and right profile. Share of short-term debt is within safe limits, although it has risen in recent years. Most of the debt is at fixed interest rates which minimises volatility on the budget," the report said.

Since the government's debt is mostly from domestic sources, the currency risk to the debt portfolio is insignificant as is the likely impact of volatile international capital markets.

"Conventional indicators of debt sustainability, level and cost of debt indicate that debt profile of government is within sustainable limits, and consistently improving," the report added.