In a published article titled ‘The Shape of Growth Compatible Fiscal Consolidation,’ Reserve Bank of India’s Deputy Governor Michael Debabrata Patra, along with co-authors, challenges the International Monetary Fund’s (IMF) analysis of India’s general government debt. The article disputes the IMF’s projections, projecting a lower debt-GDP ratio for India, emphasizing the benefits of prudent fiscal consolidation coupled with sustained economic growth.
Empirical Evidence and Projections: The article, featured in the RBI’s February Bulletin, underscores the advantages of long-term fiscal prudence, stating that investments in social and physical infrastructure, climate mitigation, digitalization, and labor force skilling can contribute to sustained economic growth. Contrary to the IMF’s estimate, the article projects a decline in India’s general government debt-GDP ratio to 73.4% by 2030-31, 5 percentage points lower than the IMF’s predicted trajectory of 78.2%.
Baseline Projections and Fiscal Outlook: The baseline projection of the debt-GDP ratio suggests a steady decline, reaching 77.4% by 2030-31, challenging the IMF’s concerns that India’s ratio could surpass 100% in the medium term due to historical shocks. The RBI emphasizes the need for continued fiscal prudence without advocating for further tightening. However, it clarifies that the expressed views in the article belong to the authors and not necessarily to the RBI.
Interim Budget and Fiscal Policy: In related fiscal developments, India’s Interim Budget for 2024-25 predicts a gross fiscal deficit of the Union government at 5.1% of GDP, aligning with the target of 4.5% by 2025-26. The analysis also highlights a sustained focus on capital expenditure post-pandemic, with its share of GDP increased to 3.4%. This reinforces ongoing discussions about India’s fiscal policy and its implications for economic growth and stability.
