Indian government's debt levels will reach 91 per cent of gross domestic product (GDP) in the current fiscal for the first time since 1980, before moderating slowly to 80 per cent by the end of the decade, says a report. The spike in debt-to-GDP ratio will restrict the country's ability to increase its spending significantly and support economic activity in the 2020s decade. The COVID-19 pandemic will further impact government's spending.
According to a Motilal Oswal Financial Services report, the government's (center + states) debt rose to 75 per cent of GDP in FY20 from 70 per cent in FY18. It is seen rising further to 91 per cent of GDP in FY21 and peak at 91.3 per cent of GDP in FY22.
The debt-to-GDP ratio shows how likely a country is to pay off its debt. The higher the ratio, the less likely the country will repay its debt and the higher its risk of default. Investors often look at this ratio to evaluate the government's ability to fund its debt. According to a World Bank report, if the debt-to-GDP ratio of a country exceeds 77 per cent for a prolonged duration, it slows down economic growth.
As per Motilal Oswal report, it may take another decade (or even more) to bring down debt levels to 60 per cent of GDP - the target the government had hoped to achieve by FY25 a few years ago.
"Assuming a gradual fall in the debt-to-GDP ratio, the government's primary spending is projected to grow around 7 per cent over the 2020s decade, lower than 11.3 per cent in the previous decade and marking the slowest growth in any decade since the 1970s," the brokerage said in its report.
The slow growth in primary spending means that the government would not be able to grow its investments (capital outlays) at the same pace as it has done in the past decade. There is a high possibility that fiscal investments would grow even slower in the 2020s which could impact non-interest revenue spending (such as defense, salary & wages, pensions, etc.), the report said.
The report warned that real GDP growth in the next decade would slow to 5-6 per cent during 2020s as compared to 7 per cent in the 2010s decade, unless private spending picks up strongly. It is notable that personal consumption and government spending have been the key drivers of real GDP growth in the past few years.
In the past six years, fiscal spending (consumption + investments) has been one of the key drivers of economic activity. While real GDP growth averaged at 6.8 per cent between FY14 and FY20, real fiscal spending grew at an average of 9 per cent during the period. In FY20, while real GDP growth weakened to 4.2 per cent, fiscal spending is estimated to have contributed 1.1 percentage point (pp) or 27 per cent to annual real GDP growth. During the past three years, government spending has contributed almost a quarter to annual real GDP growth, the report noted.