Focus expenditure on development needs, says RBI report

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In a research paper that counters the IMF’s gloomy prediction of the government of India’s debt ballooning to more than 100% of the country’s GDP in the near future, the Reserve Bank of India has said that the Centre needs to target expenditure on development, given the growth needs of the nation.

The RBI paper is titled “The Shape of Growth Compatible Fiscal Consolidation”.

In the second half of December, after the IMF sounded this warning in a paper, the government had argued that the risk linked to the sovereign debt was not as ominous as the IMF sounded it to be simply because most of it was in domestic currency and not in foreign exchange. India’s executive director at the fund, K V Subramanian, voiced his difference of opinion in this regard at that time only.

In its current publication, the RBI has said the interim budget statements signal that judicious spending could shrink government debt-GDP ratio to 73.4% by 2030-31. It would be a good 500 basis points lower than the IMF’s projected 78.2%.

“With recalibration of government expenditure, the general government debt-GDP ratio is projected to decline to 73.4% by 2030-31, around 5 percentage points lower than the IMF’s projected trajectory of 78.2%,” read the paper. It has been authored by Michael Debabrata Patra, Samir Ranjan Behera, Harendra Kumar Behera, Shesadri Banerjee, Ipsita Padhi and Saksham Sood. It carries the standard disclaimer that the views are not necessarily those of the central bank.

The comments in the paper is significant since debt-GDP ratio is projected to rise in developed economies from 112.1% in 2023 to 116.3% in 2028. For emerging and middle-income economies it could rise from 68.3% to 78.1% in the same period.

The baseline projection by the authors says that the debt-GDP ratio could go for a secular decline, reaching 77.4% in 2030-31.

“It is in this context that we reject the IMF’s contention that if historical shocks materialise,” read the report.

The interim Budget speech of Union finance minister on February 1 has clearly stated that the government would go for yearly reduction in the fiscal deficit besides sustaining emphasis on capital expenditure on a sustained basis.

The paper has set forth arguments on the ground of empirical findings in a general equilibrium framework where judicious fiscal consolidation and growth outweigh short-run costs.