Fiscal transparency and accountability must be ensured to make room for market confidence in the high public debt regime
Fiscal transparency and accountability must be ensured to make room for market confidence in the high public debt regime
Globally the public debt, that is, the total borrowing done by the government, is increasing. The International Monetary Fund’s (IMF) Global Financial Stability Report published in April 2022 showed that in emerging market economies, the average ratio of public debt to gross domestic product (GDP) rose to a record 67% last year. Public debt, even in advanced economies, increased from 103% in 2019 to 123% in 2020, falling to 115% of GDP in 2022. India registered a significant increase in this ratio, from 75.1% in 2019 to 90.1% in 2020. However, according to a recent IMF Fiscal Monitor, it is expected to fall to 85.3% by 2025.
amid rising rates
In a low interest rate regime, public debt is easier to handle as the cost of borrowing is relatively low. Therefore, from a macroeconomic perspective, higher public debt was warranted in a lower interest rate regime. To boost capital infrastructure spending, which would ‘crowd in private investment’, and also to narrow the production gap. Lower real interest rates created the notion of truly painless fiscal expansion. However, with central banks around the world raising interest rates and global risks remaining, the focus is now on the stability of the public debt – because with higher interest rates, the cost of borrowing rises.
Internal market borrowings account for about 70% of the public debt in India for this fiscal year. A look at the internal debt maturity profile revealed that the proportion of securities maturing in less than a year has increased from 3.9% in March 2020 to 5.44% of total outstanding in December 2021.
In addition, the proportion maturing in less than five years has increased from 28.97% to 29.94% during the same period. The implication of short-term loans (less than one-five years) is immediate refinancing risk. It is important to recalculate the debt maturity structure towards longer duration securities to mitigate the negative repercussions of hike in interest rates. However, external debt is not a cause for concern as it is just 0.70% of the public debt in this financial year and is mostly from official sources which are long-term and concessional in nature.
Debt repayment – the burden of the public debt – is also increasing. In India, the interest payments to revenue receipts ratio is reaching 42.6% (BE, or BE) in the current fiscal as compared to 39% (Revised Estimate) in the previous year. The ratio of interest payment to revenue expenditure has increased to 29.4% in this fiscal as compared to 25.7% in the previous year.
Against the backdrop of geopolitical risks and uncertainties, there is a need to emphasize fiscal regulations and the Fiscal Responsibility and Budget Management (FRBM) threshold ratio of public debt and deficit. The medium-term fiscal consolidation path by the Finance Minister to reduce the fiscal deficit to GDP ratio to 4.5% by 2025-26 is welcome.
Rethink debt stability in terms of key ratios
debt stability in terms of key ratios like The 60% debt to GDP ratio needs a rethink. Ideally, public debt is considered sustainable if a country can ‘get out of debt’. Technically this requires that the real rate of interest does not exceed the real growth of the economy. That’s why it’s important to focus on growth. Fiscal policy remains too lenient to support the growth recovery process, especially when monetary policy has to respond to rising inflation by raising interest rates. Fiscal policy is moving away from spending related to pandemic emergency packages to building strong capital infrastructure to crowd in private investment to support growth recovery.
To get a consolidated picture of the general government deficit, analysis of debt-deficit dynamics at the state level is important. In India, the fiscal deficit threshold for GDP for states has been raised to 4% of GSDP, within which 0.5% of this additional borrowing space is linked to structural reforms in the power sector. The emphasis on structural reforms is particularly welcome when the slowdown in growth is a ‘scarring process’ rather than a momentary cyclicity in the growth slowdown.
In conclusion, the process of fiscal normalization expected by heavy curbs on public debt could stifle growth recovery. Therefore, strengthening the credibility of fiscal policy is critical to ensuring fiscal marking. of ‘communication’ Medium-term fiscal framework vital by providing roadmap to reduce public debt To gain investor confidence. There is a need to ensure fiscal transparency and accountability to make room for market confidence in the high public debt regime. Therefore, setting up of a Fiscal Council in India is crucial to analyze fiscal risks and formulate a post-pandemic fiscal strategy to ensure fiscal credibility in times of geopolitical uncertainties.
Lekha Chakraborty is Professor, National Institute of Public Finance and Policy, New Delhi; and Member of the Board of Management, International Institute of Public Finance, Munich
Emmanuel Thomas is a Doctoral Fellow, Center for Economic Studies and Planning, JNU, New Delhi; and Assistant Professor, St. Thomas College (Autonomous) Thrissur